Dynamic short-sales constraints, price limits and price delays

Abstract

This paper takes advantage of a natural experiment on short-sales constraints in Taiwan stock market to explore its e¤ect on price e¢ ciency. Since September 1998, short-sales are prohibited at a price below the close price of the previous trading day. This creates interesting daily dynamics of short-sales constraints. Unlike proxies used in the literature for short-sales constraints such as short interest or lending fees, the daily dynamic constraints in Taiwan do not su¤er from potential endogeneity or reverse causality. We .nd no evidence that the price e¢ ciency is reduced due to the dynamic short-sales constraints. We discuss how a fully rational expectation framework can potentially explain the results. We also study the e¤ect of daily price limits on the price e¢ ciency and .nd it decreases signi.cantly if stocks hit their price limits on the previous trading day.