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The dynamics of short sales constraints and market quality: An experimental approach

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  • Cabrera, Juan
  • Gousgounis, Eleni

Abstract

We test the effect of short sale constraints on market quality in an experimental setting. Short sale constrained securities trade at a premium, which is often higher than the difference between the view of the most optimistic investor and the fundamental value. Opinion dispersion contributes to overpricing; this result is more pronounced at the time opinion dispersion is induced. As time progresses, traders update their valuations with information from trading. Consequently, opinion dispersion narrows and its effect on overpricing dissipates. Under short sale constraints, the speed of price adjustment is slower, as prices never fully converge to their fundamental values.

Suggested Citation

  • Cabrera, Juan & Gousgounis, Eleni, 2021. "The dynamics of short sales constraints and market quality: An experimental approach," Journal of Financial Markets, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:finmar:v:53:y:2021:i:c:s1386418120300185
    DOI: 10.1016/j.finmar.2020.100549
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    More about this item

    Keywords

    Short sale constraints; Opinion dispersion; Market efficiency; Price bubbles; Price discovery; Experimental;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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