Abstract

http://ssrn.com/abstract=895733
 
 

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Can Liquidity Events Explain the Low-Short-Interest Puzzle? Implications from the Options Market*


Jefferson Duarte


Rice University

Xiaoxia Lou


University of Delaware - Alfred Lerner College of Business and Economics

Ronnie Sadka


Boston College - Carroll School of Management

January 27, 2006

8th Annual Texas Finance Festival

Abstract:     
This paper argues that liquidity events in short selling, such as short squeezes, margin calls, and stock specialness, may be an important part of short-selling constraints. We gauge the importance of liquidity events by utilizing a market-based measure, which is the cost of using options to limit the potential losses of short selling. Our approach circumvents the typical endogeneity problem in directly estimating the magnitude of short-sale constraints. We show that the costs of insurance against liquidity events exceed the abnormal profits of short positions. Our results therefore suggest that liquidity events can impose substantial costs on short sellers, and may thus explain the low-short-interest puzzle.

Number of Pages in PDF File: 43

Keywords: Short-sale constraints, Liquidity, Limits to arbitrage, Asset-pricing anomalies

JEL Classification: G12, G14

working papers series





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Date posted: April 7, 2006  

Suggested Citation

Duarte, Jefferson and Lou, Xiaoxia and Sadka, Ronnie, Can Liquidity Events Explain the Low-Short-Interest Puzzle? Implications from the Options Market* (January 27, 2006). 8th Annual Texas Finance Festival. Available at SSRN: http://ssrn.com/abstract=895733 or http://dx.doi.org/10.2139/ssrn.895733

Contact Information

Jefferson Duarte (Contact Author)
Rice University ( email )
6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States
713.3486137 (Phone)
Xiaoxia Lou
University of Delaware - Alfred Lerner College of Business and Economics ( email )
Newark, DE 19716
United States
Ronnie Sadka
Boston College - Carroll School of Management ( email )
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
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