Asset Prices Under Short-Sale Constraints
By Yang Bai, Eric C. Chang, Jiang Wang. 2006
115 citations recorded by the source corpus.
In 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.
View Paper: https://www.semanticscholar.org/paper/af954bae367d906cdeafcc49ff2dc06880e9f3ca
How researchers see this paper
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- Jennifer Huang
- Jiang Wang
- Francisco Gomes
- John Y. Campbell
- John M. Griffin
- Bruno Biais
- Wei Li
- Natividad Blasco
Citations in the corpus
- Liquidity and Market Crashes (2009, background): “6 Models with short-sale constraints, such as Hong and Stein (2003), Yuan (2005), and Bai, Chang, and Wang (2006) , can generate negative skewness in returns.”
- Price Efficiency and Short Selling (2011, unknown): “…lending transactions across 26 countries, we analyze whether short selling constraints reduce price efficiency and affect the magnitude and frequency of crashes, along with the hypotheses drawn from Diamond and Verrecchia(1987); Duffie, Garleanu, and Pedersen (2002); Bai, Chang, and Wang (2006).”
- Limits of Arbitrage (2010, unknown): “Bai et al. (2006) show that short-sale constraints can cause underpricing because they generate uncertainty about the extent of negative private information.”