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Short sale constraints, divergence of opinion and asset value: Evidence from the laboratory

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  • Fellner, Gerlinde
  • Theissen, Erik

Abstract

The overvaluation hypothesis (Miller 1977) predicts that a) stocks are overvalued in the presence of short selling restrictions and that b) the overvaluation increases in the degree of divergence of opinion. We design an experiment that allows us to test these predictions in the laboratory. The results indicate that prices are higher with short selling constraints, but the overvaluation does not increase in the degree of divergence of opinion. We further find that trading volume is lower and bid-ask spreads are higher when short sale restrictions are imposed.

Suggested Citation

  • Fellner, Gerlinde & Theissen, Erik, 2011. "Short sale constraints, divergence of opinion and asset value: Evidence from the laboratory," CFR Working Papers 11-03, University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:1103
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Uri Ben-Zion & Ido Erev & Ernan Haruvy & TAL SHAVIT, 2007. "Under-Diversification And The Role Of Best Reply To Pattern," Working Papers 0707, Ben-Gurion University of the Negev, Department of Economics.
    2. Tibor Neugebauer & Sascha Füllbrunn, 2013. "Deflating Bubbles in Experimental Asset Markets: Comparative Statics of Margin Regulations," LSF Research Working Paper Series 13-14, Luxembourg School of Finance, University of Luxembourg.
    3. Hauser, Florian & Huber, Jürgen, 2012. "Short-selling constraints as cause for price distortions: An experimental study," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1279-1298.
    4. Shahrabani, Shosh & Shavit, Tal & Benzion, Uri, 2008. "Short-selling and the WTA-WTP gap," Economics Letters, Elsevier, vol. 99(1), pages 131-133, April.
    5. Sascha Füllbrunn & Tibor Neugebauer, 2012. "Margin Trading Bans in Experimental Asset Markets," Jena Economics Research Papers 2012-058, Friedrich-Schiller-University Jena.
    6. Shavit, Tal & Rosenboim, Mosi & Malul, Miki, 2011. "Opportunity costs in buying and short selling--Do they really matter?," Economics Letters, Elsevier, vol. 112(1), pages 122-124, July.
    7. Malul, Miki & Rosenboim, Mosi & Shavit, Tal, 2013. "So when are you loss averse? Testing the S-shaped function in pricing and allocation tasks," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 101-112.

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    More about this item

    Keywords

    overvaluation hypothesis; short selling constraints; divergence of opinion;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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