Efficiency and the Bear: Short Sales and Markets around the World
IMD International; European Corporate Governance Institute (ECGI); Yale University - International Center for Finance
William N. Goetzmann
Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)
China Academy of Financial Research (CAFR); Yale School of Management; University of California, Davis - Graduate School of Management
Yale ICF Working Paper No. 02-45; EFA 2003 Annual Conference; AFA 2004 San Diego Meetings; 14th Annual Conference on Financial Economics & Accounting
We analyze cross-sectional and time series information from forty-six equity markets around the world, to consider whether short sales restrictions affect the efficiency of the market, and the distributional characteristics of returns to individual stock and market indices. We construct two measures of price efficiency that quantify the asymmetric response of individual stock returns to negative vs. positive information, and find that prices incorporate information faster in countries where short sales are allowed and practiced. This evidence is consistent with more efficient price discovery at the individual security level. A common conjecture by regulators is that short sales restrictions can reduce the relative severity of a market panic. We test this conjecture by examining the skewness of market returns. We find some evidence that in markets where short selling is either prohibited or not practices, market returns display significantly less negative skewness. However, at the individual stock level, short sales restrictions appear to make no difference.
Number of Pages in PDF File: 69
JEL Classification: F36, G15, G28
Date posted: October 6, 2004
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