The Pricing of Stock Uncertainty Under Short‐Sale Constraints in the China Stock Market

ABSTRACT This paper examines the pricing of stock uncertainty in the Chinese stock market, where short‐sale constraints are nearly binding. We introduce the absolute value of the macro‐finance uncertainty beta as a novel measure of stock uncertainty and document a significantly negative uncertainty premium, which is more pronounced among stocks with high information asymmetry. These findings suggest that the negative uncertainty premium reflects mispricing and market inefficiencies induced by short‐sale restrictions, consistent with the implications of Miller (1977). Accordingly, relaxing short‐sale constraints and improving market design could enhance stock market efficiency, resource allocation, and promote economic growth in China.