Price Efficiency and Short Selling
Pedro A. C. Saffi
University of Cambridge - Judge Business School
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, G15
Date posted: December 4, 2006 ; Last revised: March 7, 2011
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