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Testing the Effects of Short-Selling Restrictions on Asset Prices

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  • Rodrigo De-Losso

    ()

  • Alan De Genaro, Bruno C. Giovannetti

Abstract

Testing the effects of short-selling restrictions on asset prices is challenging: shifts in stock lending supply usually are not observed directly. This paper takes advantage of a unique dataset that contains actual shifts in the lending supply curve for several stocks on the Brazilian market. The dataset comprises daily information from January 2009 to July 2011 from the whole stock lending market in Brazil. We find that short-selling restrictions generate overpricing and that this effect increases with greater dispersion of investor opinion, consistent with a number of theoretical studies.

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File URL: http://www.fea.usp.br/feaecon/RePEc/documentos/DeLossoGenaroGiovannetti18WP.pdf
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Bibliographic Info

Paper provided by University of São Paulo (FEA-USP) in its series Working Papers, Department of Economics with number 2012_18.

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Date of creation: 12 Sep 2012
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Handle: RePEc:spa:wpaper:2012wpecon18

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Keywords: asset prices; short-selling restrictions; stock lending;

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References

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  1. Michael J. Aitken & Alex Frino & Michael S. McCorry & Peter L. Swan, 1998. "Short Sales Are Almost Instantaneously Bad News: Evidence from the Australian Stock Exchange," Journal of Finance, American Finance Association, American Finance Association, vol. 53(6), pages 2205-2223, December.
  2. 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.
  3. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, Elsevier, vol. 18(2), pages 277-311, June.
  4. Tobias J. Moskowitz & Mark Grinblatt, 1999. "Do Industries Explain Momentum?," Journal of Finance, American Finance Association, American Finance Association, vol. 54(4), pages 1249-1290, 08.
  5. Charles M. Jones & Owen A. Lamont, 2001. "Short Sale Constraints and Stock Returns," NBER Working Papers 8494, National Bureau of Economic Research, Inc.
  6. Shalen, Catherine T, 1993. "Volume, Volatility, and the Dispersion of Beliefs," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 405-34.
  7. Duffie, Darrell & Garleanu, Nicolae & Pedersen, Lasse Heje, 2002. "Securities lending, shorting, and pricing," Journal of Financial Economics, Elsevier, Elsevier, vol. 66(2-3), pages 307-339.
  8. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2002. "Breadth of ownership and stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 66(2-3), pages 171-205.
  9. Harrison, J Michael & Kreps, David M, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 92(2), pages 323-36, May.
  10. Eric C. Chang & Joseph W. Cheng & Yinghui Yu, 2007. "Short-Sales Constraints and Price Discovery: Evidence from the Hong Kong Market," Journal of Finance, American Finance Association, American Finance Association, vol. 62(5), pages 2097-2121, October.
  11. Ofek, Eli & Richardson, Matthew & Whitelaw, Robert F., 2004. "Limited arbitrage and short sales restrictions: evidence from the options markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 74(2), pages 305-342, November.
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Cited by:
  1. Fernando D. Chague & Rodrigo De-Losso, Alan De Genaro, Bruno C. Giovannetti, 2013. "Short Selling and Inside Information," Working Papers, Department of Economics, University of São Paulo (FEA-USP) 2013_06, University of São Paulo (FEA-USP).

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