IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Dynamic short-sale constraints, price limits, and price dynamics

  • Tse-Chun Lin
Registered author(s):

    Purpose – The purpose of this paper is to take advantage of a natural experiment in Taiwan to test the effect of short-sales constraints on price dynamics. Design/methodology/approach – Since September 1998, short-selling is banned at a price below the close price of the previous trading day. The new rule creates unique daily dynamics of short-sales constraints. The paper employs a difference-in-difference method to evaluate whether the short-sales constraint rule plays an important role in the price dynamics. Findings – The results show that stock prices react to information in a way similar to if short-selling was not banned. This is in line with the implication of a rational expectation framework like Diamond and Verrecchia. Research limitations/implications – The paper has implications on the short selling bans in the 2008/2009 credit crisis and the European debt crisis because the bans are public information as those in this setting. The rational agents in the market could incorporate the bans into price beliefs which could lead to the ineffectiveness of the policy. The short-sales constraints may be widely imposed in the crisis but they are not the effective tools to alleviate downward price pressures. Practical implications – The results suggest that the effort of the government to boost stock price by imposing short sales constraints will not be effective if rational investors take the constraints into account while forming their beliefs. Originality/value – Unlike existing short-sales constraint proxies like short interest or lending fees, the dynamic constraints do not suffer from endogeneity. Moreover, the constraints are public information and thus ideal for testing the rational expectation models, in which investors have to be aware of the level of the constraints.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.emeraldinsight.com/journals.htm?issn=1743-9132&volume=8&issue=3&articleid=17038888&show=abstract
    Download Restriction: Cannot be freely downloaded

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Emerald Group Publishing in its journal International Journal of Managerial Finance.

    Volume (Year): 8 (2012)
    Issue (Month): 3 ()
    Pages: 256-279

    as
    in new window

    Handle: RePEc:eme:ijmfpp:v:8:y:2012:i:3:p:256-279
    Contact details of provider: Web page: http://www.emeraldinsight.com

    Order Information: Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
    Web: http://emeraldgrouppublishing.com/products/journals/journals.htm?id=ijmf Email:


    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Karl B. Diether & Kuan-Hui Lee & Ingrid M. Werner, 2009. "Short-Sale Strategies and Return Predictability," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 575-607, February.
    2. Paul A. Gompers & Andrew Metrick, . "Institutional Investors and Equity Prices," Rodney L. White Center for Financial Research Working Papers 20-99, Wharton School Rodney L. White Center for Financial Research.
    3. Arturo Bris & William Goetzmann & Ning Zhu, 2004. "Efficiency and the Bear: Short Sales and Markets around the World," Yale School of Management Working Papers ysm327, Yale School of Management, revised 01 Feb 2005.
    4. Charles M. Jones & Owen A. Lamont, 2001. "Short Sale Constraints and Stock Returns," NBER Working Papers 8494, National Bureau of Economic Research, Inc.
    5. Brad M. Barber & Yi-Tsung Lee & Yu-Jane Liu & Terrance Odean, 2009. "Just How Much Do Individual Investors Lose by Trading?," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 609-632, February.
    6. Nagel, Stefan, 2005. "Short sales, institutional investors and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 78(2), pages 277-309, November.
    7. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
    8. Senchack, A. J. & Starks, Laura T., 1993. "Short-Sale Restrictions and Market Reaction to Short-Interest Announcements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(02), pages 177-194, June.
    9. Hemang Desai & K. Ramesh & S. Ramu Thiagarajan & Bala V. Balachandran, 2002. "An Investigation of the Informational Role of Short Interest in the Nasdaq Market," Journal of Finance, American Finance Association, vol. 57(5), pages 2263-2287, October.
    10. Karl B. Diether & Kuan-Hui Lee & Ingrid M. Werner, 2009. "It's SHO Time! Short-Sale Price Tests and Market Quality," Journal of Finance, American Finance Association, vol. 64(1), pages 37-73, 02.
    11. Ekkehart Boehmer & Charles M. Jones & Xiaoyan Zhang, 2008. "Which Shorts Are Informed?," Journal of Finance, American Finance Association, vol. 63(2), pages 491-527, 04.
    12. Ofek, Eli & Richardson, Matthew & Whitelaw, Robert F., 2004. "Limited arbitrage and short sales restrictions: evidence from the options markets," Journal of Financial Economics, Elsevier, vol. 74(2), pages 305-342, November.
    13. Kim, Kenneth & Rhee, S Ghon, 1997. " Price Limit Performance: Evidence from the Tokyo Stock Exchange," Journal of Finance, American Finance Association, vol. 52(2), pages 885-99, June.
    14. Boehmer, Ekkehart & Huszar, Zsuzsa R. & Jordan, Bradford D., 2010. "The good news in short interest," Journal of Financial Economics, Elsevier, vol. 96(1), pages 80-97, April.
    15. 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.
    16. 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.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eme:ijmfpp:v:8:y:2012:i:3:p:256-279. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Louise Lister)

    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 references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.