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Positive Return–Volatility Correlation and Short Sale Constraints: Evidence from the Chinese Market
Author(s) -
Wu Liang,
Luo Hong,
Fu Zhiming
Publication year - 2018
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/ajfs.12204
Subject(s) - volatility (finance) , economics , bidding , margin (machine learning) , financial economics , stock market , econometrics , monetary economics , stock (firearms) , microeconomics , mechanical engineering , paleontology , horse , machine learning , computer science , engineering , biology
The market price is a convex function of information when short sales are constrained. Borrowing constraints limit investors to bidding up the price. The two effects imply an asymmetric return–volatility correlation ( RVC ) when information shifts. We build a model to show that: (i) short selling decreases RVC , while margin trading increases RVC ; (ii) RVC increases with disagreement; and (iii) RVC increases with returns. The Chinese stock market is ideal for the empirical test because only certain stocks are eligible for short selling and margin trading in the slow policy adoption process. We obtain evidence to support the theoretical predictions correlation.