IDEAS home Printed from https://ideas.repec.org/a/ebl/ecbull/eb-20-00799.html
   My bibliography  Save this article

Effect of Short Selling on Market Liquidity, Price, and Volatility: A Dynamic Perspective

Author

Listed:
  • Soonho Kim

    (Pukyong National University Business School)

Abstract

In order to verify the effect of short selling activities on market efficiency, volatility, and price, I conduct the Granger causality test, impulse response analysis, and variance decomposition using a vector autoregressive model. Empirical tests show that short selling enhances market efficiency by reducing trading costs. On the other hand, short selling does not significantly increase stock volatility or decrease prices. This study verifies that short selling improves market quality without a negative effect on volatility and price.

Suggested Citation

  • Soonho Kim, 2020. "Effect of Short Selling on Market Liquidity, Price, and Volatility: A Dynamic Perspective," Economics Bulletin, AccessEcon, vol. 40(4), pages 3140-3146.
    • Handle: RePEc:ebl:ecbull:eb-20-00799
    as

    Download full text from publisher

    File URL: http://www.accessecon.com/Pubs/EB/2020/Volume40/EB-20-V40-I4-P274.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Arturo Bris & William N. Goetzmann & Ning Zhu, 2007. "Efficiency and the Bear: Short Sales and Markets Around the World," Journal of Finance, American Finance Association, vol. 62(3), pages 1029-1079, June.
    2. Pedro A. C. Saffi & Kari Sigurdsson, 2011. "Price Efficiency and Short Selling," Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 821-852.
    3. Ekkehart Boehmer & Juan (Julie) Wu, 2013. "Short Selling and the Price Discovery Process," Review of Financial Studies, Society for Financial Studies, vol. 26(2), pages 287-322.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hou, Yang & Meng, Jiayin, 2018. "The momentum effect in the Chinese market and its relationship with the simultaneous and the lagged investor sentiment," MPRA Paper 94838, University Library of Munich, Germany.
    2. Oscar Bernal Diaz & Astrid Herinckx & Ariane Szafarz, 2014. "Which short-selling regulation is the least damaging to market efficiency? Evidence from Europe," Post-Print CEB, ULB -- Universite Libre de Bruxelles, vol. 37, pages 244-256, March.
    3. He, Qing & Fang, Cai, 2019. "Regulatory sanctions and stock pricing efficiency: Evidence from the Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 58(C).
    4. Markus K. Brunnermeier & Martin Oehmke, 2014. "Predatory Short Selling," Review of Finance, European Finance Association, vol. 18(6), pages 2153-2195.
    5. Massa, Massimo & Qian, Wenlan & Xu, Weibiao & Zhang, Hong, 2015. "Competition of the informed: Does the presence of short sellers affect insider selling?," Journal of Financial Economics, Elsevier, vol. 118(2), pages 268-288.
    6. Jiang, Haiyan & Chen, Jun, 2019. "Short selling and financial reporting quality: Evidence from Chinese AH shares," Journal of Contemporary Accounting and Economics, Elsevier, vol. 15(1), pages 118-130.
    7. Dagmar Linnertová, 2017. "How Did Short Sale Ban Affect German Capital Market Risk?," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 65(6), pages 2017-2024.
    8. Chen, Shenglan & Chou, Robin K. & Liu, Xiaoling & Wu, Yuhui, 2020. "Deregulation of short-selling constraints and cost of bank loans: Evidence from a quasi-natural experiment," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).
    9. Bae, Kwangil & Kang, Jangkoo & Lee, Soonhee, 2016. "Bullish/bearish/neutral strategies under short sale restrictions," Journal of Banking & Finance, Elsevier, vol. 71(C), pages 227-239.
    10. Blau, Benjamin M. & Whitby, Ryan J., 2018. "How does short selling affect liquidity in financial markets?," Finance Research Letters, Elsevier, vol. 25(C), pages 244-250.
    11. Hsin, Chin-Wen & Peng, Shu-Cing, 2023. "Investor propensity to speculate and price delay in emerging markets," International Review of Financial Analysis, Elsevier, vol. 86(C).
    12. Louis Gagnon & Jonathan Witmer, 2014. "Distribution of Ownership, Short Sale Constraints, and Market Efficiency: Evidence from Cross-Listed Stocks," Financial Management, Financial Management Association International, vol. 43(3), pages 631-670, September.
    13. Pascal Busch & Stefan Obernberger, 2017. "Actual Share Repurchases, Price Efficiency, and the Information Content of Stock Prices," Review of Financial Studies, Society for Financial Studies, vol. 30(1), pages 324-362.
    14. Alves, Carlos & Mendes, Victor & Silva, Paulo Pereira da, 2016. "Analysis of market quality before and during short-selling bans," Research in International Business and Finance, Elsevier, vol. 37(C), pages 252-268.
    15. Boulton, Thomas J. & Smart, Scott B. & Zutter, Chad J., 2020. "Worldwide short selling regulations and IPO underpricing," Journal of Corporate Finance, Elsevier, vol. 62(C).
    16. Massa, Massimo & von Beschwitz, Bastian, 2015. "Biased Shorts: Stock Market Implications of Short Sellers? Disposition Effect," CEPR Discussion Papers 10535, C.E.P.R. Discussion Papers.
    17. Dayong Lv & Wenfeng Wu, 2020. "Margin trading and price efficiency: information content or price‐adjustment speed?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 2889-2918, September.
    18. Lee, Bong-Soo & Ko, Kwangsoo, 2014. "Are Japanese short sellers information detectives?," Journal of the Japanese and International Economies, Elsevier, vol. 34(C), pages 89-97.
    19. Massimo Massa & Bastian von Beschwitz, 2015. "Biased Shorts: Short sellers’ Disposition Effect and Limits to Arbitrage," International Finance Discussion Papers 1147, Board of Governors of the Federal Reserve System (U.S.).
    20. Doojin Ryu & Heejin Yang, 2018. "The directional information content of options volumes," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(12), pages 1533-1548, December.

    More about this item

    Keywords

    short selling; market efficiency; volatility; stock price;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-20-00799. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: John P. Conley (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.