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Asymmetry of Long-Short Cost in Derivatives Market, Heterogeneous Beliefs and Stock Price Crash: A Theoretical Model

Received: 17 May 2019    Accepted:     Published: 29 July 2019
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Abstract

In this paper, we construct a four-period-double-market model in this paper. By including the stock market with short selling restrictions and the derivative market without short selling restrictions but with long-short costs in the model, we study the relationship between the asymmetry of long-short cost in derivative market, investors' heterogeneous beliefs and the stock price crash risk. According to the conclusion of closed solution of our model, the asymmetry of short cost in derivatives market will distort the implied price of derivatives market, which will send a wrong message to stock market and intertwined with investors' heterogeneous beliefs in the stock market. Moreover, under the general equilibrium model, a derivative market with symmetrical long-short cost can completely eliminate the risk of stock price crash. But if the short-selling cost is relative higher than the buying cost, the stock price will be overvalued in the early periods, and the negative events will result in a more serious stock price crash than the single market situation. Our model emphasizes the distorting effect of long-short cost asymmetry on the price discovery and information flow function of derivatives market, and reminds government departments to improve market mechanism and strengthen supervision when promoting the development of derivatives market. The government should actively guide the derivatives market to play its due role in the financial market.

DOI 10.11648/j.eco.20190802.15
Published in Economics (Volume 8, Issue 2, June 2019)
Page(s) 73-87
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Heterogeneous Beliefs, Stock Price Crash, Asymmetric Long-Short Costs

References
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[4] Kim, Yongtae, Haidan Li, and Siqi Li, 2014, Corporate social responsibility and stock price crash risk, Journal of Banking and Finance 43, 1-13.
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[7] Bebchuk, Lucian A., 2009, Written testimony, hearing on compensation structures and systemic risk, Committee on Financial Services, U.S. House of Representatives, June 11.
[8] Benmelech, Efraim, Eugene Kandel, and Pietro Veronesi, 2010, Stock-based compensation and CEO (dis) incentives, Quarterly Journal of Economics 125, 1769-1820.
[9] Kim, Jeong-Bon, Yinghua Li, and Liandong Zhang, 2011a, Corporate tax avoidance and stock price crash risk: Firm-level analysis, Journal of Financial Economics 100, 639-662.
[10] Kim, Jeong-Bon, Zheng Wang, and Liandong Zhang, 2016, CEO overconfidence and stock price crash risk, Contemporary Accounting Research 33, 1720-1749.
[11] Andreou, Panayiotis C., Christodoulos Louca, and Andreas P. Petrou, 2017, CEO age and stock price crash risk, Review of Finance 21, 1287-1325.
[12] Chen, Joseph, Harrison Hong, and Jeremy C. Stein, 2001, Forecasting crashes: Trading volume, past returns, and conditional skewness in stock prices, Journal of Financial Economics 61, 345-381.
[13] Hong, Harrison, and Jeremy C. Stein, 2003, Differences of opinion, short-sales constraints and market crashes, Review of Financial Studies 16, 487-525.
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[15] Callen, Jeffrey L., and Xiaohua Fang, 2016, Short interest and stock price crash risk, Journal of Banking and Finance 60, 181-194.
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[17] Bhatia, Mikhail, Viet Nga Cao, Yangyang Chen, and Cameron Truong, 2014, Option trading and stock price crash risk, Working Paper.
Author Information
  • Chinese Academy of Finance and Development, Central University of Finance and Economics, Beijing, P. R. China

  • School of Finance, Central University of Finance and Economics, Beijing, P. R. China

  • School of Econmics and Management, Shandong Youth University of Political Scienece, Jinan, P. R. China

  • School of Econmics and Management, Shandong Youth University of Political Scienece, Jinan, P. R. China; Development Research Center of Shandong Provincial People’s Government, Jinan, P. R. China

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  • APA Style

    Yiming Ma, Juncheng Li, Yaguang Li, Ke Gao. (2019). Asymmetry of Long-Short Cost in Derivatives Market, Heterogeneous Beliefs and Stock Price Crash: A Theoretical Model. Economics, 8(2), 73-87. https://doi.org/10.11648/j.eco.20190802.15

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    ACS Style

    Yiming Ma; Juncheng Li; Yaguang Li; Ke Gao. Asymmetry of Long-Short Cost in Derivatives Market, Heterogeneous Beliefs and Stock Price Crash: A Theoretical Model. Economics. 2019, 8(2), 73-87. doi: 10.11648/j.eco.20190802.15

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    AMA Style

    Yiming Ma, Juncheng Li, Yaguang Li, Ke Gao. Asymmetry of Long-Short Cost in Derivatives Market, Heterogeneous Beliefs and Stock Price Crash: A Theoretical Model. Economics. 2019;8(2):73-87. doi: 10.11648/j.eco.20190802.15

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  • @article{10.11648/j.eco.20190802.15,
      author = {Yiming Ma and Juncheng Li and Yaguang Li and Ke Gao},
      title = {Asymmetry of Long-Short Cost in Derivatives Market, Heterogeneous Beliefs and Stock Price Crash: A Theoretical Model},
      journal = {Economics},
      volume = {8},
      number = {2},
      pages = {73-87},
      doi = {10.11648/j.eco.20190802.15},
      url = {https://doi.org/10.11648/j.eco.20190802.15},
      eprint = {https://download.sciencepg.com/pdf/10.11648.j.eco.20190802.15},
      abstract = {In this paper, we construct a four-period-double-market model in this paper. By including the stock market with short selling restrictions and the derivative market without short selling restrictions but with long-short costs in the model, we study the relationship between the asymmetry of long-short cost in derivative market, investors' heterogeneous beliefs and the stock price crash risk. According to the conclusion of closed solution of our model, the asymmetry of short cost in derivatives market will distort the implied price of derivatives market, which will send a wrong message to stock market and intertwined with investors' heterogeneous beliefs in the stock market. Moreover, under the general equilibrium model, a derivative market with symmetrical long-short cost can completely eliminate the risk of stock price crash. But if the short-selling cost is relative higher than the buying cost, the stock price will be overvalued in the early periods, and the negative events will result in a more serious stock price crash than the single market situation. Our model emphasizes the distorting effect of long-short cost asymmetry on the price discovery and information flow function of derivatives market, and reminds government departments to improve market mechanism and strengthen supervision when promoting the development of derivatives market. The government should actively guide the derivatives market to play its due role in the financial market.},
     year = {2019}
    }
    

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  • TY  - JOUR
    T1  - Asymmetry of Long-Short Cost in Derivatives Market, Heterogeneous Beliefs and Stock Price Crash: A Theoretical Model
    AU  - Yiming Ma
    AU  - Juncheng Li
    AU  - Yaguang Li
    AU  - Ke Gao
    Y1  - 2019/07/29
    PY  - 2019
    N1  - https://doi.org/10.11648/j.eco.20190802.15
    DO  - 10.11648/j.eco.20190802.15
    T2  - Economics
    JF  - Economics
    JO  - Economics
    SP  - 73
    EP  - 87
    PB  - Science Publishing Group
    SN  - 2376-6603
    UR  - https://doi.org/10.11648/j.eco.20190802.15
    AB  - In this paper, we construct a four-period-double-market model in this paper. By including the stock market with short selling restrictions and the derivative market without short selling restrictions but with long-short costs in the model, we study the relationship between the asymmetry of long-short cost in derivative market, investors' heterogeneous beliefs and the stock price crash risk. According to the conclusion of closed solution of our model, the asymmetry of short cost in derivatives market will distort the implied price of derivatives market, which will send a wrong message to stock market and intertwined with investors' heterogeneous beliefs in the stock market. Moreover, under the general equilibrium model, a derivative market with symmetrical long-short cost can completely eliminate the risk of stock price crash. But if the short-selling cost is relative higher than the buying cost, the stock price will be overvalued in the early periods, and the negative events will result in a more serious stock price crash than the single market situation. Our model emphasizes the distorting effect of long-short cost asymmetry on the price discovery and information flow function of derivatives market, and reminds government departments to improve market mechanism and strengthen supervision when promoting the development of derivatives market. The government should actively guide the derivatives market to play its due role in the financial market.
    VL  - 8
    IS  - 2
    ER  - 

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