Price Formation in a Market with Short Sale Prohibition: An Empirical Investigation

67 Pages Posted: 16 Aug 2001

See all articles by Pongsak Hoontrakul

Pongsak Hoontrakul

Sasin of Chulalongkorn University

Peter Ryan

University of Ottawa - Faculty of Administration

Anya Khanthavit

Thammasat University - Faculty of Commerce and Accountancy

Stylianos Perrakis

Concordia University, Quebec - John Molson School of Business

Date Written: August 2000

Abstract

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

Hoontrakul, Pongsak and Ryan, Peter and Khanthavit, Anya and Perrakis, Stylianos, Price Formation in a Market with Short Sale Prohibition: An Empirical Investigation (August 2000). Available at SSRN: https://ssrn.com/abstract=280059 or http://dx.doi.org/10.2139/ssrn.280059

Pongsak Hoontrakul (Contact Author)

Sasin of Chulalongkorn University ( email )

Sasa Patasala Building, Soi Chulalongkorn 12 (2)
Phyathai Road
Bangkok 10330
Thailand
+662 954 1689 (Phone)
+662 954 1690 (Fax)

HOME PAGE: http://www.pongsak.hoontrakul.com

Peter Ryan

University of Ottawa - Faculty of Administration ( email )

136 Jean-Jacques Lussier
Room 257A
Ottawa, Ontario K1N 6N5
Canada
613-562-5800 Ext. 4733 (Phone)

Anya Khanthavit

Thammasat University - Faculty of Commerce and Accountancy ( email )

Bangkok
Thailand

Stylianos Perrakis

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

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