

Review of Finance Volume 21, Issue 5, 1 August 2017, Pages 1975-2005
The authors analyze the effects of spot market short-sale constraints on derivatives trading using a unique Chinese stock market futures trading database. Due to short-sale constraints, investors’ pessimistic views on the underlying index can be expressed solely through short futures positions, while investors’ optimistic views are dispersed through their spot and futures trading. They hypothesize that trading of pessimistic investors (with net short futures positions) contains more information than that of optimistic investors. They document the negative volatility–volume relation is associated with pessimistic investors’ trading, which attenuates with less-restricted spot market short-sale rules. Large pessimistic investors’ net demand can predict future returns, but not the case for optimistic investors.