Dynamic Short-Sales Constraints, Price Limits and Price Delays

47 Pages Posted: 13 Jan 2009 Last revised: 12 Sep 2010

See all articles by Tse-Chun Lin

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Date Written: May 30, 2010

Abstract

This paper takes advantage of a natural experiment in Taiwan to test the effect of short-sales constraints on price delays. The new short-sales policy creates unique daily dynamics of short-sales constraints. The constraints are free from endogeneity bias. They are also public information and thus ideal for testing the rational expectation models. Our results show that stock prices react to information in a way similar to if short-selling was not prohibited. This is in line with Diamond and Verrecchia (1987). We also study the effect of price limits on the delays and find them increase if prices hit the limits.

Keywords: Short-sales constraints, price limits, price delay

JEL Classification: G14, G18

Suggested Citation

Lin, Tse-Chun, Dynamic Short-Sales Constraints, Price Limits and Price Delays (May 30, 2010). Available at SSRN: https://ssrn.com/abstract=1326081 or http://dx.doi.org/10.2139/ssrn.1326081

Tse-Chun Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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