Price Formation in a Market with Short Sale Prohibition: An Empirical Investigation
67 Pages Posted: 16 Aug 2001
Date Written: August 2000
This study examines the behaviour of stock prices in the presence of asymmetric information, when market participants are prohibited from short selling. Although insiders privy to negative information may not exploit this information by selling if they do not own the stock, the market maker can deduce the occurrence of bad news by observing the trading patterns. Previous work indicates that good news is associated with high volume and bad news with low volume, and that the speed of price adjustment is greater on bad news than on good news. This result depends upon parameters determining the structure of the market in terms of the types of participants (informed or uninformed) and their relative holdings of the stock. The conclusions are tested by an empirical study of stocks trading on the Stock Exchange of Thailand, where short sales are prohibited. The empirical results are used to verify the theory and also to examine the composition of the Thai market by estimation of the relevant parameters.
Suggested Citation: Suggested Citation