Short selling restrictions and index futures pricing: Evidence from China

초록

This study examines the impact of short-selling restrictions on futures mispricing (relative to various benchmarks) in the market for CSI 300 index futures. In mid-2015, Chinese regulators imposed a new short-selling restriction in an attempt to curb excessive stock market volatility. Results show that futures under-pricing occurs more frequently at the transaction cost levels, ranging from 0 to 1.5%, while futures over-pricing occurs less frequently at the transaction cost levels from 0 to 0.75% under the new short sale rule. The results support the hypothesis that shortselling restrictions impose costs to the arbitrage trading strategies by arbitrageurs who do not own the underlying assets in the presence of futures under-pricing (or over-pricing of the underlying assets), resulting in more persistent futures under-pricing.

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