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Informational Efficiency under Short Sale Constraints

  • Robert A. Jarrow
  • Martin Larsson

A constrained informationally efficient market is defined to be one whose price process arises as the outcome of some equilibrium where agents face restrictions on trade. This paper investigates the case of short sale constraints, a setting which despite its simplicity, generates new insights. In particular, it is shown that short sale constrained informationally efficient markets always admit equivalent supermartingale measures and local martingale deflators, but not necessarily local martingale measures. And if in addition some local martingale deflator turns the price process into a true martingale, then the market is constrained informationally efficient. Examples are given to illustrate the subtle phenomena that can arise in the presence of short sale constraints, with particular attention to representative agent equilibria and the different notions of no arbitrage.

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File URL: http://arxiv.org/pdf/1401.1851
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Paper provided by arXiv.org in its series Papers with number 1401.1851.

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Date of creation: Jan 2014
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Handle: RePEc:arx:papers:1401.1851
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  1. Constantinides, George M, 1982. "Intertemporal Asset Pricing with Heterogeneous Consumers and without Demand Aggregation," The Journal of Business, University of Chicago Press, vol. 55(2), pages 253-67, April.
  2. Ekkehart Boehmer & Charles M. Jones & Xiaoyan Zhang, 2013. "Shackling Short Sellers: The 2008 Shorting Ban," Review of Financial Studies, Society for Financial Studies, vol. 26(6), pages 1363-1400.
  3. Alessandro Beber & Marco Pagano, 2013. "Short-Selling Bans Around the World: Evidence from the 2007–09 Crisis," Journal of Finance, American Finance Association, vol. 68(1), pages 343-381, 02.
  4. Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 309-41.
  5. Hugonnier, Julien, 2012. "Rational asset pricing bubbles and portfolio constraints," Journal of Economic Theory, Elsevier, vol. 147(6), pages 2260-2302.
  6. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, 08.
  7. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
  8. Gabriel Frahm, 2013. "Asset Pricing and Valuation under the Real-World Probability Measure," Papers 1304.3824, arXiv.org, revised Dec 2014.
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