The Influence of Short-selling on Market Efficiency—from a View of Pair Trading

Abstract

Theoretically, the equity market would become more complete and stock price be more sensitive to new information with Margin Trading. This paper focuses on the influence of margin trading on pricing efficiency and bases its study on pair trading. Ornstein-Uhlenbeck process is called to simulate the spread of the prices of pair stocks and MLE is used to estimate its mean reversion rate, which represents the pricing efficiency. It is found that margin trading improves the pricing efficiency but its influence varies with different industry and market value of the stock