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Informational Efficiency under Short Sale Constraints

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  • Robert A. Jarrow
  • Martin Larsson

Abstract

A constrained informationally efficient market is defined to be one whose price process arises as the outcome of some equilibrium where agents face restrictions on trade. This paper investigates the case of short sale constraints, a setting which despite its simplicity, generates new insights. In particular, it is shown that short sale constrained informationally efficient markets always admit equivalent supermartingale measures and local martingale deflators, but not necessarily local martingale measures. And if in addition some local martingale deflator turns the price process into a true martingale, then the market is constrained informationally efficient. Examples are given to illustrate the subtle phenomena that can arise in the presence of short sale constraints, with particular attention to representative agent equilibria and the different notions of no arbitrage.

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Paper provided by arXiv.org in its series Papers with number 1401.1851.

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Date of creation: Jan 2014
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Handle: RePEc:arx:papers:1401.1851

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  1. Gabriel Frahm, 2013. "Pricing in Complex and Efficient Financial Markets," Papers 1304.3824, arXiv.org, revised Jul 2014.
  2. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
  3. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, American Finance Association, vol. 56(4), pages 1533-1597, 08.
  4. Alessandro Beber & Marco Pagano, 2009. "Short-Selling Bans around the World: Evidence from the 2007-09 Crisis," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 241, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 03 Sep 2011.
  5. Hugonnier, Julien, 2012. "Rational asset pricing bubbles and portfolio constraints," Journal of Economic Theory, Elsevier, Elsevier, vol. 147(6), pages 2260-2302.
  6. Constantinides, George M, 1982. "Intertemporal Asset Pricing with Heterogeneous Consumers and without Demand Aggregation," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 55(2), pages 253-67, April.
  7. Ekkehart Boehmer & Charles M. Jones & Xiaoyan Zhang, 2013. "Shackling Short Sellers: The 2008 Shorting Ban," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 26(6), pages 1363-1400.
  8. Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 11(2), pages 309-41.
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