The No-Short Return Premium
46 Pages Posted: 24 Jan 2017 Last revised: 12 Feb 2018
Date Written: February 22, 2018
Theory predicts that securities with greater limits to arbitrage are more subject to mispricing and thus should command a higher return premium. We test this prediction using the unique regulatory setting from the Hong Kong stock market, in which some stocks can be sold short and others cannot. We show that no-short stocks on average earn significantly higher returns than shortable stocks and the two groups of stocks tend to comove negatively. Moreover, stocks that comove more with the portfolio of no-short stocks on average earn higher subsequent abnormal returns while those comoving more with the shortable stocks earn lower subsequent abnormal returns. New additions to and deletions from the shorting list only partially contribute to the no-short return premium.
Keywords: Short-Sale Regulation; Return Comovement; Limits to Arbitrage; Mispricing
JEL Classification: G02; G10; G12; G28
Suggested Citation: Suggested Citation