60 Pages Posted: 4 Apr 2013 Last revised: 30 Aug 2017
Date Written: April 14, 2017
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: 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
By Eli Ofek