Short-Selling, Uptick Rule, and Market Quality: Evidence from High-Frequency Data on Hong Kong Stock Exchange
43 Pages Posted: 20 Nov 2010 Last revised: 4 Mar 2011
Date Written: March 1, 2011
Abstract
Much empirical research has been conducted concerning the effect of short-selling on market quality and volatility. However, the evidence is inconclusive and still a matter of debate. Using intraday data in a pure order-driven market we show that allowing for short-selling decreases the adverse selection costs for less-visible firms, firms with less analyst coverage, larger adverse-selection cost component of the bid-ask spread, low price per share, and high relative tick size (given the same market capitalization). Allowing for short-selling also decreases (increases) intraday volatility for less- (more-) visible stocks. In addition we document that with the uptick rule in place (not in place) there is not statistically significant difference in liquidity (intraday volatility) between stocks that are allowed for short-selling and those that are not.
Keywords: short-selling, uptick rule, market quality, liquidity, volatility
JEL Classification: G1, G2
Suggested Citation: Suggested Citation
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