Regulating noisy short-selling of troubled firms?
Purpose – The purpose of this paper is to examine the efficacy of recent policy initiatives taken by the US Securities and Exchange Commission banning naked “short-selling” of specific financial stocks. The paper also considers the merits of reinstating “uptick rule” 10a-1, which prohibits short-selling securities on a downtick. Design/methodology/approach – The paper studies theoretical implications of short-selling in a simple state-claim model, reflecting varying amounts of short interest in a representative firm and noise trading in the market. Price discovery depends on the proportion of noise trading compared to rational short-selling. The empirical analysis focuses on price volatility under short-selling constraints employing simple regressions, EGARCH analysis and simulated price behavior under a hypothetical uptick rule. Findings – The EGARCH results suggest short-selling constraints had non-uniform impacts on the persistence and leverage effects associated with price volatility. The corresponding price simulations indicate a hypothetical uptick rule might have helped stabilize price behavior in some cases, depending on the nature of the stochastic process and whether or not quantity constraints on short-selling are binding. Originality/value – The theoretical arguments and empirical findings suggest a “focused approach” to market regulation would be a more efficient means of discouraging trend chasing without compromising “informed trading” – that is to say, safeguarding price discovery and market liquidity without impeding arbitrage or confounding probability beliefs regarding firm survival. These conclusions are largely in accord with recent policy analysis and proposals outlined in Avgouleas.
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.
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.
Volume (Year): 1 (2009)
Issue (Month): 3 (May)
|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://www.emeraldinsight.com/jfep.htm Email:
When requesting a correction, please mention this item's handle: RePEc:eme:jfeppp:v:1:y:2009:i:3:p:227-245. 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: (Virginia Chapman)
If references are entirely missing, you can add them using this form.