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

TitleDynamic short-sale constraints, price limits, and price dynamics
Authors
KeywordsFinancial Markets
Price Delay
Price Dynamics
Price Limits
Short-Sale Constraints
Stock Prices
Taiwan
Issue Date2012
PublisherEmerald Group Publishing Limited. The Journal's web site is located at http://www.emeraldinsight.com/ijmf.htm
Citation
International Journal Of Managerial Finance, 2012, v. 8 n. 3, p. 256-279 How to Cite?
AbstractPurpose: 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. © Emerald Group Publishing Limited.
Persistent Identifierhttp://hdl.handle.net/10722/177797
ISSN
2015 SCImago Journal Rankings: 0.212
References

 

DC FieldValueLanguage
dc.contributor.authorLin, TCen_US
dc.date.accessioned2012-12-19T09:39:56Z-
dc.date.available2012-12-19T09:39:56Z-
dc.date.issued2012en_US
dc.identifier.citationInternational Journal Of Managerial Finance, 2012, v. 8 n. 3, p. 256-279en_US
dc.identifier.issn1743-9132en_US
dc.identifier.urihttp://hdl.handle.net/10722/177797-
dc.description.abstractPurpose: 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. © Emerald Group Publishing Limited.en_US
dc.languageengen_US
dc.publisherEmerald Group Publishing Limited. The Journal's web site is located at http://www.emeraldinsight.com/ijmf.htmen_US
dc.relation.ispartofInternational Journal of Managerial Financeen_US
dc.subjectFinancial Marketsen_US
dc.subjectPrice Delayen_US
dc.subjectPrice Dynamicsen_US
dc.subjectPrice Limitsen_US
dc.subjectShort-Sale Constraintsen_US
dc.subjectStock Pricesen_US
dc.subjectTaiwanen_US
dc.titleDynamic short-sale constraints, price limits, and price dynamicsen_US
dc.typeArticleen_US
dc.identifier.emailLin, TC: tsechunlin@hku.hken_US
dc.identifier.authorityLin, TC=rp01077en_US
dc.description.naturelink_to_subscribed_fulltexten_US
dc.identifier.doi10.1108/17439131211238897en_US
dc.identifier.scopuseid_2-s2.0-84863450330en_US
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-84863450330&selection=ref&src=s&origin=recordpageen_US
dc.identifier.volume8en_US
dc.identifier.issue3en_US
dc.identifier.spage256en_US
dc.identifier.epage279en_US
dc.publisher.placeUnited Kingdomen_US
dc.identifier.scopusauthoridLin, TC=55293326500en_US

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