This study examines how short-sale constraints affect investors’ information acquisition and thereby shape stock price efficiency. By exploiting two settings that relax short-sale constraints in the US and China, respectively, we find that the removal of short-sale constraints increases investors’ information acquisition in both markets, but the effect is more prompt in China. Investors acquire value-relevant information, especially bad news, and improve their short-selling decisions in both markets. Lastly, information acquisition induced by the removal of short-sale constraints improves price efficiency. Our evidence shows that a reduction in trading frictions promotes information acquisition and improves price efficiency.

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This study investigates the effectiveness of the volatility-timing strategy in the Chinese equity market. We find that the volatility-managed portfolio (VMP) consistently outperforms its original counterpart, both in individual factor analysis and mean-variance efficient multifactor assessment, and the results are robust in outof-sample setup. Notably, the outperformance is mostly driven by stocks with high arbitrage risk, short-selling constraints, relatively smaller size, and lottery preferences. Further, the multifactor portfolio constructed from the volatility-managed strategy outperforms other portfolios especially in turmoil periods such as high sentiment and low macroeconomic confidence periods. Our findings suggest that in the Chinese equity market with typical trading frictions, volatility timing strategies consistently gain profitable performance.

This paper will partially solve the puzzle of implied volatility spreads from the perspective of short-selling (option-implied borrowing rate). Specifically, we use Chinese SSE 50 ETF options data to examine the relationship between the option-implied volatility spreads and option-implied borrow rate. Using nonparametric regression models, we find that there is a clear negative correlation between the implied volatility spreads and the implied borrowing rate. Furthermore, our results show that there is a significant nonlinearity between these two variables. Finally, it is interesting to note that the option volatility spreads are zero when the option prices include the short selling cost.

This study examines how short-sale constraints affect investors’ information acquisition and thereby shape stock price efficiency. By exploiting two settings that relax short-sale constraints in the US and China, respectively, we find that the removal of short-sale constraints increases investors’ information acquisition in both markets, but the effect is more prompt in China. Investors acquire value-relevant information, especially bad news, and improve their short-selling decisions in both markets. Lastly, information acquisition induced by the removal of short-sale constraints improves price efficiency. Our evidence shows that a reduction in trading frictions promotes information acquisition and improves price efficiency.

Although China has made great economic achievements, it is still an emerging market, and the financial market systems are different from those of developed countries. As such, the market phenomenon presented in mature financial markets may be different from that in the Chinese stock market. This paper reveals that the impact of volume on anomalous returns in the Chinese stock market shows different effects on overvalued stocks and undervalued stocks, while volume in the mature US financial market shows the classic theory of volume amplifying the effect of anomalous returns (Han et al. 2021). What causes this? Our research indicates that the relationship between volume and future stock returns in China differs from that in US due to the stringent short-selling restrictions imposed in China. In China, strong short-selling restrictions are in place, a decrease in volume has a significantly negative relationship with future returns for both overvalued (t-value = 6.50) and undervalued (t-value = 2.45) stocks. Furthermore, we demonstrate that the underlying mechanism in the effects of volume on the future returns of overpriced and underpriced stocks are distinct.

This study focuses on the relationship between individual stocks’ systemic tail risk and future returns. Analyzing data from China's A-share market, we document an abnormal negative crosssectional relationship between stocks’ systemic tail risk and returns, which cannot be explained by firm-specific characteristics. We show that the joint effect of investor expectation of stock return persistence and investor sentiment contributes to the systemic tail risk anomaly. Investors tend to underestimate the loss persistence of stocks that have suffered large losses in the most recent period and overprice such stocks, leading to a strong negative relationship between stock systemic tail risk and return. In addition, constraints on short selling exacerbate individual stocks’ systemic tail risk and also explain the systemic tail risk anomaly.

Purpose – For Chinese companies that cross-list in Chinese A share and Hong Kong (H share) markets, the H share price has been consistently lower than the A share price by an average of 85% in recent years. This is puzzling because most institutional differences between the two markets have been eliminated since 2007. The purpose of this study is to explain the puzzle of the price difference of AþH companies. Design/methodology/approach – Using all A and H share Chinese firms in the period 2007–2013 and a simultaneous equations approach, this study identifies three new explanations for the recent price difference. Findings – First, utilizing a unique earning quality measure that is directly related to non-persistent components of fair value accounting under International Financial Reporting Standards (IFRS), this study finds that the lower the earnings quality, the lower the H share price relative to the A share price, and hence the greaterthe price difference. Second, the higherthe myopic investor ownership in A share firms, the largerthe A share price relative to the H share price. Third, the short-selling mechanism introduced to the A share market since 2010 helps reduce the price difference. Originality/value – First, this study identifies three new explanations for the puzzle of the AH price difference which remains substantial even afterthe institutional and accounting standards differences between the two markets were eliminated. Second, we examine the impact of the implementation of fair value accounting under IFRS in an emerging market on the pricing difference of cross-listed shares and reveal that it can induce an unintended negative consequence on the pricing difference of cross-listed shares. Third, this study contributes to the literature on short sales by providing its mitigating role in pricing differences across two different markets. Finally, this study makes improvements in research design, which utilizes a unique measure of earnings quality that is directly related to the implementation of IFRS and a simultaneous equations approach that minimizes endogeneity concern.

This paper uses ensemble learning to build a predictive model to analyze the short selling mechanism of short institutions. We demonstrate the value of combining domain knowledge and machine learning methods in financial market. On the basis of the benchmark model, we use three input data: stock price, financial data and textual data and we employ one of the most powerful machine learning methods, ensemble learning, rather than the commonly used method of logistic regression. In specific methods, we use LSTM-AdaBoost and CART-AdaBoost for model prediction. The results show that the model we train have strong prediction ability for short-selling and the company' s financial text data is more likely to have an impression of whether it would be shorted or not.

Fund managers usually set aside certain amount of cash to pay for possible redemptions, and it is believed that this will affect overall fund performance. This paper examines the properties of efficient portfolios in the mean-variance framework in the presence of a cash account. We show that investors will retain part of funds in cash, as long as the required return is lower than the expected rerun on the portfolio corresponding to the point of intersection of the traditional efficient frontier and the straight line that passes through the minimum-variance portfolio and the origin in the mean-variance plane (portfolio q1 ). In addition, the efficient portfolios determined by our model are proportional to portfolio q1 , and are more efficient than traditional efficient portfolios. Using a simulation, we illustrate that 6% to 9% of total funds are to be retained in the cash account if no-short-selling constraint is imposed. Based on real data, our out-of-sample empirical results confirm the theoretical findings.