Do Short Selling and Margin Trading Affect Price Randomness?

Purpose: Both short sellers and margin traders believe in active investment. However, they have the opposite opinions about prediction of future share price direction: while are those who predict declines, investors buying on increases. Short selling trading generally perceived to intensify stock volatility undermine market stability. this general perception investment practice lacks scientific empirical evidence. This paper investigates effect randomness Korean market. Design/methodology/approach: The random walk hypothesis has been tested for many equity markets since Lo MacKinley (1988) work, which proposes variance ratio test hypothesis. Dickey-Fuller unit root or Box-Pierce Q widely used efficiency. (1989) indicate that is more reliable powerful than two tests. Ayadi Pyun (1994) also acknowledge appealing other traditional tests walk. Findings: Our main findings as follows. increases ratios, suggesting decreases degree randomness. negatively related ratios. makes prices predictable; contrary, random. Dividing by market, KOSPI KOSDAQ shows exacerbates compared We find a significant positive relation between absolute deviation when constrained. Research limitations/implications: study tried provide new implications both practitioners academicians analyzing effects randomness, major aspect still some limitations efficiency not completely fully analyzed. Therefore, we expect further studies will be conducted additional implications. Originality/value: uses same data impact trading. Thus, separate strands trading, our would facilitate comparison results these methods. Analyzing comparing methods enhance reliability comparative results.