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Asset Pricing Implications of Short-sale Constraints in Imperfectly Competitive Markets

60 Pages Posted: 4 Apr 2013 Last revised: 30 Aug 2017

Hong Liu

Washington University in St. Louis - Olin Business School; China Academy of Financial Research (CAFR)

Yajun Wang

University of Maryland - Robert H. Smith School of Business

Date Written: April 14, 2017

Abstract

We study the impact of short-sale constraints on market prices and liquidity in imperfectly competitive markets in which market-makers have market power. We show that, with or without information asymmetry, short-sale constraints decrease bid prices, but increase bid-ask spreads and liquidity-risk. If market-makers are risk-averse, short-sale constraints also increase ask prices. In addition, the impact of short-sale constraints can increase with market transparency. Our main results are unaffected by endogenous information acquisition or reduced information revelation due to short-sale constraints.

Keywords: Short-sale Constraints, Bid-Ask Spread, Information Acquisition, Imperfect Competition, Welfare

JEL Classification: D42, D53, D82, G12, G18

Suggested Citation

Liu, Hong and Wang, Yajun, Asset Pricing Implications of Short-sale Constraints in Imperfectly Competitive Markets (April 14, 2017). Available at SSRN: https://ssrn.com/abstract=2243305 or http://dx.doi.org/10.2139/ssrn.2243305

Hong Liu

Washington University in St. Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-5883 (Phone)

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Yajun Wang (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

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