Impact of Short Selling Constraints on Mispricing Degree

There is not a certain conclusion about whether relaxing short selling constraints can reduce the degree of security market's mispricing. However, the margin trading system established in China provides an excellent experiment process for this problem. We test the differences of the mispricing degree between the before and after the event, then verify whether short selling can affect the degree of mispricing, how much will the short selling ratio affect the degree of mispricing, and explore what factors can have an effect on the sensitivity between short selling constraints and mispricing. The conclusions show that short selling can significantly reduce the degree of mispricing, but there exists a nonlinear relationship between short selling ratio and mispricing, when the short selling ratio is in the range of 4%~14%, as the ratio increases, the degree of mispricing reduces, however, when the ratio is below 4% or above 14%, the affect has inverse performances. At the same time, the more stocks that can be shortsaled institution investors have, the more sensitive the relation between short selling constraints and mispricing will be.