Positive Skewness, Anti-Leverage, Reverse Volatility Asymmetry, and Short Sale Constraints: Evidence from the Chinese Markets

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.