Research on the Impact of Short Selling Mechanism on Investors’ Positive Feedback Trading Behavior

Abstract

With the background of China’s Margin Trading pilot, the paper studies the effect of short selling mechanism on investors’ positive feedback trading behavior. The research results show that positive feedback trading behavior exists in Chinese stock market, and the launching of the short selling mechanism inhibits effectively the positive feedback trading behavior. Investors can show their pessimism towards the stock price by going short selling, thus the stock price can return quickly to the basic value. At the same time, leverage effect consists in the stock market, namely that investors react more strongly to bad news than to good news. After the implement of margin trading and short selling mechanism, the risk hedging mechanism increases, and investors in the market generally tend to react rationally to good news and bad news.