Asymmetry of Long-Short Cost in Derivatives Market, Heterogeneous Beliefs and Stock Price Crash: A Theoretical Model
Volume 8, Issue 2, June 2019, Pages: 73-87
Received: May 17, 2019;
Published: Jul. 29, 2019
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Yiming Ma, Chinese Academy of Finance and Development, Central University of Finance and Economics, Beijing, P. R. China
Juncheng Li, School of Finance, Central University of Finance and Economics, Beijing, P. R. China
Yaguang Li, School of Econmics and Management, Shandong Youth University of Political Scienece, Jinan, P. R. China
Ke Gao, 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
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.
Asymmetry of Long-Short Cost in Derivatives Market, Heterogeneous Beliefs and Stock Price Crash: A Theoretical Model, Economics.
Vol. 8, No. 2,
2019, pp. 73-87.
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