Positive skewness, anti-leverage, reverse volatility asymmetry, and short sale constraints: Evidence from the Chinese markets

TL;DR

This paper investigates statistical anomalies in the Chinese stock market, such as positive skewness and reverse volatility asymmetry, and finds that relaxing short sale constraints reduces these anomalies, highlighting the impact of investor behavior and market regulations.

Contribution

It provides empirical evidence linking short sale constraints to specific market anomalies and demonstrates how policy changes can mitigate these effects.

Findings

Short sale constraints increase positive skewness and anti-leverage effect.

Lifting constraints reduces skewness and reverse volatility asymmetry.

Investor response asymmetry contributes to observed anomalies.

Abstract

There are some statistical anomalies in the Chinese stock market, i.e., positive return skewness, anti-leverage effect (positive returns induce higher volatility than negative returns); and reverse volatility asymmetry (contemporaneous return-volatility correlation is positive). In this paper, we first confirm the existence of these anomalies using daily firm-level stock return data on the raw returns, excess returns and normalized excess returns. We empirically show that the asymmetry response of investors to news is one cause of the statistical anomalies if short sales are constrained. Then in the context of slow adoption of security lending policy, we conduct panel analysis and empirically verify that the lifting of short sale constraints leads to significantly less skewness, less anti-leverage effect and less reverse volatility asymmetry. Positive skewness is a feature of lottery. Investors are encouraged to bet on the upside lottery like potentials in the Chinese markets where the stocks skew more to the upside when short sales are constrained.