Does the 2008 Short Sale Ban Affect the Enforcement of the Law of One Price? Evidence from Australia

28 Pages Posted: 17 Jan 2012

See all articles by Binh Huu Do

Binh Huu Do

Monash University; Financial Research Network (FIRN)

Viet Minh Do

Monash University - Department of Accounting; Financial Research Network (FIRN)

Daniel Chai

Monash University

Date Written: March 2012

Abstract

Using evidence from pairs trading in Australia’s equity market, we study the effect of the 2008 worldwide ban on short selling on the Law of One Price (LOP). We find that the ban surprisingly does not hinder the enforcement of the LOP. Violations did arise rather frequently in the turbulent market during the ban period; however, they were subsequently corrected, with prices of close economic substitutes promptly converging to parity. We show that the working of the LOP is not driven by professional arbitrageurs. We suggest that rational, long‐only investors are likely to be the enforcer of the LOP, as these investors who are unbound by the ban, simply sell their holdings of stocks that are overpriced relative to their close economic substitutes.

Keywords: Law of One Price, Pairs trading, The 2008 short sale ban, G11, G12, G14

Suggested Citation

Do, Binh Huu and Do, Viet Minh and Chai, Daniel, Does the 2008 Short Sale Ban Affect the Enforcement of the Law of One Price? Evidence from Australia (March 2012). Accounting & Finance, Vol. 52, Issue 1, pp. 117-144, 2012, Available at SSRN: https://ssrn.com/abstract=1986558 or http://dx.doi.org/10.1111/j.1467-629X.2011.00409.x

Binh Huu Do (Contact Author)

Monash University ( email )

Building 11E
Clayton, Victoria 3800
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Viet Minh Do

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Daniel Chai

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

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