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It's Sho Time! Short-Sale Price-Tests and Market Quality
Karl B. Diether Tuck School of Business at Dartmouth College Kuan-Hui Lee Korea University Business School Ingrid M. Werner The Ohio State University - Fisher College of Business August 14, 2007 Fisher College of Business Working Paper No. 2007-03-002 Charles A. Dice Center WP No. 2006-13 Abstract: We examine the effects of the SEC mandated temporary suspension of short-sale price-tests for a set of Pilot securities. While short-selling activity increased both for NYSE and NASDAQ-listed Pilot stocks, returns and volatility at the daily level are unaffected. NYSE-listed Pilot stocks experience more symmetric trading patterns and a slight increase in spreads and intraday volatility after the suspension while there is a smaller effect on market quality for NASDAQlisted Pilot stocks. The results suggest that the effect of the price-tests on market quality can largely be attributed to the distortions in order flow created by the price-tests in the first place. Therefore, we believe that the price-tests can safely be permanently suspended.
Keywords: Short-sales, SEC, Regulation, Market Quality, NYSE, Nasdaq JEL Classifications: G00, G18, G20, K22 Working Paper SeriesDate posted: June 22, 2006 ; Last revised: August 30, 2007Suggested CitationContact Information
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