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Hide and Seek: Uninformed Traders and the Short-sales Constraints

Author

Listed:
  • Jinghan Cai

    (Department of Economics and Finance, The University of Scranton)

  • Chiu Yu Ko

    (Department of Economics, National University of Singapore)

  • Yuming Li

    (School of Business and Economics, California State University)

  • Le Xia

    (Research Department, BBVA, Hong Kong)

Abstract

We examine the effect of short selling via the unique setting in the Hong Kong stock market and find that, when a stock becomes shortable, its trading activities decrease, liquidities worsen, and information asymmetries increase. This finding contradicts both the existing theoretical models, and recent empirical studies using global financial crisis data. We extend the sequential trading model with short-sales constraints of one asset by Diamond and Verrecchia (1987) to the case of multiple assets. The model predicts that our empirical results are due to uninformed traders quitting from trading the shortable securities.

Suggested Citation

  • Jinghan Cai & Chiu Yu Ko & Yuming Li & Le Xia, 2019. "Hide and Seek: Uninformed Traders and the Short-sales Constraints," Annals of Economics and Finance, Society for AEF, vol. 20(1), pages 319-356, May.
    • Handle: RePEc:cuf:journl:y:2019:v:20:i:1:caikolixia
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    References listed on IDEAS

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    Cited by:

    1. Ye, Qing & Zhou, Shengjie & Zhang, Jie, 2020. "Short-selling, margin-trading, and stock liquidity: Evidence from the Chinese stock markets," International Review of Financial Analysis, Elsevier, vol. 71(C).
    2. Dasilas, Apostolos, 2022. "The impact of margin trading and short selling on the investment-to-price sensitivity. Evidence from China," International Review of Financial Analysis, Elsevier, vol. 84(C).

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    More about this item

    Keywords

    Short-sales constraint; Liquidity; Information asymmetry; Microstructure;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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