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Efficiency and the Bear: Short Sales and Markets around the World

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Author Info
Arturo Bris () (Yale University, School of Management, International Center for Finance)
William N. Goetzmann () (Yale University, School of Management)
Ning Zhu () (Yale University, School of Management)

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Abstract

We analyze cross-sectional and time series information from forty-seven equity markets around the world, to consider whether short-sales restrictions affect the efficiency of the market, and the distributional characteristics of returns to individual stocks and market indices. Using the approach developed in Moerck et al. (2000) we find significantly more crosssectional variation in equity returns in markets where short selling is feasible and practiced, controlling for a host of other factors. This evidence is consistent with more efficient price discovery at the individual security level. A common conjecture by regulators is that short-sales restrictions can reduce the relative severity of a market panic. We test this conjecture by examining the skewness of market returns. We find that in markets where short selling is either prohibited or not practiced, individual stock returns display significantly less negative skewness. However, at the market level, where regulators might expect short-sales restrictions to reduce the severity of broad declines, short sales restrictions appear to make no difference.

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm321.

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Date of creation: 23 Nov 2003
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Handle: RePEc:ysm:somwrk:ysm321

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  1. Poitras, Geoffrey, 2002. "Short sales restrictions, dilution and the pricing of rights issues on the Singapore Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 10(2), pages 141-162, April. [Downloadable!] (restricted)
  2. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December. [Downloadable!] (restricted)
  3. Duffie, Darrell & Garleanu, Nicolae & Pedersen, Lasse Heje, 2002. "Securities lending, shorting, and pricing," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 307-339. [Downloadable!] (restricted)
  4. Geczy, Christopher C. & Musto, David K. & Reed, Adam V., 2002. "Stocks are special too: an analysis of the equity lending market," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 241-269. [Downloadable!] (restricted)
  5. Chen Zhiwu, 1995. "Financial Innovation and Arbitrage Pricing in Frictional Economies," Journal of Economic Theory, Elsevier, vol. 65(1), pages 117-135, February. [Downloadable!] (restricted)
  6. Hansen, Lars Peter & Jagannathan, Ravi, 1997. " Assessing Specification Errors in Stochastic Discount Factor Models," Journal of Finance, American Finance Association, vol. 52(2), pages 557-90, June. [Downloadable!] (restricted)
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  7. Li, Lianfa & Fleisher, Belton M., 2004. "Heterogeneous expectations and stock prices in segmented markets: application to Chinese firms," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(4), pages 521-538, September. [Downloadable!] (restricted)
  8. D'Avolio, Gene, 2002. "The market for borrowing stock," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 271-306. [Downloadable!] (restricted)
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  1. Kan Li & Randall Morck & Fan Yang & Bernard Yeung, 2003. "Firm-Specific Variation and Openness in Emerging Markets," William Davidson Institute Working Papers Series 2003-623, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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  2. Timotheos Angelidis & Nikolaos Tessaromatis, 2007. "Idiosyncratic Risk in Greece: Properties and Portfolio Implications," Working Papers 0001, University of Peloponnese, Department of Economics. [Downloadable!]
  3. Hirshleifer, David & Teoh, Siew Hong & Yu, Jeff Jiewei, 2009. "Short Arbitrage, Return Asymmetry And The Accrual Anomaly," MPRA Paper 16487, University Library of Munich, Germany. [Downloadable!]
  4. Louis Gagnon & Jonathan Witmer, 2009. "Short Changed? The Market's Reaction to the Short Sale Ban of 2008," Working Papers 09-23, Bank of Canada. [Downloadable!]
  5. Samuel Mongrut Montalván & Didac Ramírez Sarrió, 2005. "Discount Rates in Emerging Capital Markets," Finance 0501013, EconWPA. [Downloadable!]
  6. Griffin, John M. & Nardari, Federico & Stulz, Rene M., 2004. "Stock Market Trading and Market Conditions," Working Paper Series 2004-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  7. Gerlinde Fellner & Erik Theissen, 2006. "Short Sale Constraints, Divergence of Opinion and Asset Values: Evidence from the Laboratory," Labsi Experimental Economics Laboratory University of Siena 009, University of Siena. [Downloadable!]
  8. Li Jin & Stewart C. Myers, 2004. "R-Squared Around the World: New Theory and New Tests," NBER Working Papers 10453, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Gagnon, Louis & Karolyi, G. Andrew, 2004. "Multi-market Trading and Arbitrage," Working Paper Series 2004-9, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  10. Hyunbae Chun & Jung-Wook Kim & Jason Lee & Randall Morck, 2004. "Patterns of Comovement: The Role of Information Technology in the U.S. Economy," NBER Working Papers 10937, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Griffin, John M. & Nardari, Federico & Stulz, Rene M., 2005. "Do Investors Trade More When Stocks Have Performed Well? Evidence from 46 Countries," Working Paper Series 2005-12, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  12. James Angel & Douglas McCabe, 2009. "The Business Ethics of Short Selling and Naked Short Selling," Journal of Business Ethics, Springer, vol. 85(1), pages 239-249, February. [Downloadable!] (restricted)
  13. Timotheos Angelidis, 2008. "Idiosyncratic Risk in Emerging Markets," Working Papers 0018, University of Peloponnese, Department of Economics. [Downloadable!]
  14. Michael McKenzie & Olan T. Henry, 2007. "The Determinnts of Short Selling in the Hong Kong Equities Market," Department of Economics - Working Papers Series 1001, The University of Melbourne. [Downloadable!]
  15. John M. Griffin & Federico Nardari & Rene M. Stulz, 2004. "Stock Market Trading and Market Conditions," NBER Working Papers 10719, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. LaFond, Ryan, 2005. "Is the Accrual Anomaly a Global Anomaly?," Working papers 27856, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  17. Saffi, Pedro & Sigurdson, Kari, 2008. "Price efficiency and short selling," IESE Research Papers D/748, IESE Business School. [Downloadable!]
  18. Sebastian Auguste & Kathryn M.E. Dominguez & Herman Kamil & Linda L. Tesar, 2005. "Cross-Border Trading as a Mechanism for Implicit Capital Flight: ADRs and the Argentine Crisis," Working Papers 533, Research Seminar in International Economics, University of Michigan. [Downloadable!]
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  19. Ferreira, Daniel & Ferreira, Miguel A. & Raposo, Clara C., 2008. "Board Structure and Price Informativeness," CEI Working Paper Series 2008-4, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  20. Salim Chahine, 2006. "Differential Interpretations, Private Information and Trading Volume Around French Firms' Good News vs. Bad News Preliminary Announcements," European Accounting Review, Taylor and Francis Journals, vol. 15(3), pages 403-429, September. [Downloadable!] (restricted)
  21. Gagnon, Louis & Karolyi, G. Andrew, 2007. "Information, Trading Volume, and International Stock Return Comovements: Evidence from Cross-Listed Stocks," Working Paper Series 2006-11, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
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