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Futures mispricing, order imbalance, and short-selling constraints

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  • Lin, Emily
  • Lee, Cheng-Few
  • Wang, Kehluh
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    Abstract

    The aim of the research is to determine how the lifting of price restrictions on short sales and security-lending sales affects market efficiency, liquidity and arbitrage opportunities. The study examines trading behaviors of large and small traders separated by their transaction costs and shows the lifting of price restrictions strengthens the correlation between extreme order imbalance and extreme mispricing. Also, autocorrelations of the underpricing and overpricing persist longer, in particular for big traders, and so do those of buy-side and sell-side order imbalances. However, the outcomes for the post-lifting market efficiency are mixed. This paper provides evidence that lifting price restrictions enhances informed trading and the lead–lag relationship between mispricing and order imbalance in the cash and futures markets.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1059056012000779
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    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Economics & Finance.

    Volume (Year): 25 (2013)
    Issue (Month): C ()
    Pages: 408-423

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    Handle: RePEc:eee:reveco:v:25:y:2013:i:c:p:408-423

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    Web page: http://www.elsevier.com/locate/inca/620165

    Related research

    Keywords: Short sales; Security lending sales; Mispricing; Arbitrage; Probability of informed trading (PIN); Order imbalance;

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