Price Efficiency and Short Selling
Pedro A. C. Saffi
Cambridge Judge Business School - Finance
AQR Capital Management
August 30, 2010
AFA 2008 New Orleans Meetings Paper
IESE Business School Working Paper No. 748
Review of Finance Studies, Vol. 24, No. 3, pp. 821-852, 2011
This article studies how stock price efficiency and the distribution of returns are affected by short-sale constraints. The study is based on a global data set that includes more than 12,600 stocks from 26 countries between 2005 and 2008. Our main findings are as follows. First, lending supply has a significant impact on efficiency. Stocks with higher short-sale constraints, measured by low lending supply, have lower price efficiency. Second, relaxing short-sales constraints is not associated with an increase in either price instability or occurrence of extreme negative returns.
Number of Pages in PDF File: 41
Keywords: Short sales constraints, market efficiency, equity lending markets, extreme returns
JEL Classification: G12, G14, G15Accepted Paper Series
Date posted: December 4, 2006 ; Last revised: March 7, 2011
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