The Tick Test Rule, Investors' Opinions Dispersion, and Stock Returns: The Daily Evidence on the NYSE

56 Pages Posted: 2 Nov 2007

See all articles by Min Zhao

Min Zhao

University of Tennessee, Knoxville

Date Written: October 18, 2007


This paper investigates the impact of short sale constraints on stock returns associated with the tick-test rule in the NYSE using REG SHO daily short selling data. The results suggest removing the tick-test rule for so called 'pilot' stocks mitigates short-term stock overvaluation by approximately 2% annually. It is surprising that for large pilot stocks, lifting the tick-test rule goes beyond correcting stock overvaluation and is associated with stock undervaluation, suggesting that the SEC's recent decision of removing tick-test restrictions for all U.S. exchange-traded securities may not be considered as an optimal policy if such undervaluation is driven by predatory short sellers' price manipulation. It also shows here that a high level of daily short sale activity signals a short-term stock return reversal during the sample period. On average, a daily rebalanced portfolio consisting of a long position in stocks with the highest shorting activities and a short position of stocks with the lowest shorting activities generates an annual rate of return of more than 150%, before adjusting for trading costs. The returns of these hedge portfolios are short lived; they diminish quickly as the number of days in the holding period increases.

Keywords: The tick-test rule, Short sales, The Regulation SHO, Investors' opinions dispersion, Stock overvaluation, Price manipulation

JEL Classification: G12, G14

Suggested Citation

Zhao, Min, The Tick Test Rule, Investors' Opinions Dispersion, and Stock Returns: The Daily Evidence on the NYSE (October 18, 2007). Available at SSRN: or

Min Zhao (Contact Author)

University of Tennessee, Knoxville ( email )

The Boyd Center for Business and Economic Research
Knoxville, TN 37996
United States

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