This study has examined the impact of changes in short-sales restrictions on the dynamic relationship between the spot index and its related futures contract. The relaxation of short-sales restrictions in Hong Kong provided an ideal situation for testing the hypothesis. The results show that both the lead from futures to spot and that from spot to futures have strengthened as well as the intraday price changes in the two markets becoming more integrated after the lifting of the restrictions. The influence of short-sales restrictions on the spot-futures dynamics is further confirmed by the findings under varying market conditions. When the market is bearish and tradings in spot are most likely to be constrained by short-sales restrictions, the lead from spot to futures strengthens in periods with more liberal short-sales regulations. Hence, the results indicate that the lifting of shortsales restrictions has improved the informational efficiency of the spot market and the dynamic efficiency between the spot and the futures markets dual.
ASJC Scopus subject areas
- Business, Management and Accounting (miscellaneous)