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

Yiming Ma; Juncheng Li; Yaguang Li; Ke Gao

doi:doi:10.11648/j.eco.20190802.15

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

Yiming Ma, Juncheng Li, Yaguang Li, Ke Gao

Published in Economics (Volume 8, Issue 2)

Received: 17 May 2019 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.

Published in	Economics (Volume 8, Issue 2)
DOI	10.11648/j.eco.20190802.15
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), 2019. Published by Science Publishing Group

Keywords

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

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[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.
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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://article.sciencepublishinggroup.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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Author Information

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

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Plain Text BibTeX RIS

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

Copy | Download

@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://article.sciencepublishinggroup.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}
}

Copy | Download

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  -

Copy | Download