Regulatory Soft Interventions in the Chinese Market : Compliance Effects and Impact on Option Market Efficiency

Securities Laws in China are administered by the Chinese Securities Regulatory Commission (CSRC). The CSRC has great flexibility in administering securities laws since the committee represents the will of the state. Under the state-controlled financial system, the CSRC works closely with state-controlled financial firms and suggests, but does not mandate, actions to be taken in the equity market, especially during periods of extreme market stress. These suggestions, or soft interventions, have been used to block trades associated with short-sales, significantly reducing short-sales volume. With daily and intraday data, we investigate the impact of these interventions on put-call parity and implied volatilities. There is overwhelming evidence of increased deviations from put-call parity and changes in implied volatility after soft interventions. Our results are robust after allowing for bid-ask spreads, taxes, transaction costs and Difference-in-Differences comparisons with control securities in the Hong Kong market