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Conference Paper: Asset Prices under Short-Sales Constraints

TitleAsset Prices under Short-Sales Constraints
Authors
Issue Date2006
PublisherMITSUI LIFE - Financial Research Center
Citation
The 12th Mitsui Life Symposium on Financial Markets, Dearborn, MI, 9-10 June 2006 How to Cite?
AbstractIn this paper, we study how short-sale constraints affect asset price and market efficiency. We consider a fully rational expectations equilibrium model, in which investors trade to share risk and to speculate on private information in the presence of short-sale constraints. Short-sale constraints limit both types of trades, and thus reduce the allocational and informational efficiency of the market. Limiting short sales driven by risk-sharing simply shifts the demand for the asset upwards and consequently its price. However, limiting short sales driven by private information increases the uncertainty about the asset as perceived by less informed investors, which reduces their demand for the asset. When this information effect dominates, short-sale constraints actually cause asset prices to decrease and price volatility to increase. Moreover, we show that short-sale constraints can give rise to discrete price drops accompanied by a sharp rise in volatility when prices fail to be informative and the uncertainty perceived by uninformed investors surges.
Persistent Identifierhttp://hdl.handle.net/10722/112142

 

DC FieldValueLanguage
dc.contributor.authorChang, ECen_HK
dc.contributor.authorBai, Yen_HK
dc.contributor.authorWang, Jen_HK
dc.date.accessioned2010-09-26T03:19:26Z-
dc.date.available2010-09-26T03:19:26Z-
dc.date.issued2006en_HK
dc.identifier.citationThe 12th Mitsui Life Symposium on Financial Markets, Dearborn, MI, 9-10 June 2006-
dc.identifier.urihttp://hdl.handle.net/10722/112142-
dc.description.abstractIn this paper, we study how short-sale constraints affect asset price and market efficiency. We consider a fully rational expectations equilibrium model, in which investors trade to share risk and to speculate on private information in the presence of short-sale constraints. Short-sale constraints limit both types of trades, and thus reduce the allocational and informational efficiency of the market. Limiting short sales driven by risk-sharing simply shifts the demand for the asset upwards and consequently its price. However, limiting short sales driven by private information increases the uncertainty about the asset as perceived by less informed investors, which reduces their demand for the asset. When this information effect dominates, short-sale constraints actually cause asset prices to decrease and price volatility to increase. Moreover, we show that short-sale constraints can give rise to discrete price drops accompanied by a sharp rise in volatility when prices fail to be informative and the uncertainty perceived by uninformed investors surges.-
dc.languageengen_HK
dc.publisherMITSUI LIFE - Financial Research Center-
dc.relation.ispartofMitsui Life Symposium on Financial Marketsen_HK
dc.titleAsset Prices under Short-Sales Constraintsen_HK
dc.typeConference_Paperen_HK
dc.identifier.emailChang, EC: ecchang@business.hku.hken_HK
dc.identifier.authorityChang, EC=rp01050en_HK
dc.description.naturelink_to_OA_fulltext-
dc.identifier.doi10.1.1.181.1265-
dc.identifier.hkuros115227en_HK

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