The No-Short Return Premium

44 Pages Posted: 24 Jan 2017  

Danling Jiang

College of Business, Stony Brook University; School of Economics and Management, Southwest Jiaotong University

Xiaoming Li

Massey University - School of Economics and Finance (Albany)

Date Written: January 22, 2017

Abstract

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

Jiang, Danling and Li, Xiaoming, The No-Short Return Premium (January 22, 2017). Available at SSRN: https://ssrn.com/abstract=2903517

Danling Jiang

College of Business, Stony Brook University ( email )

306 Harriman Hall
Stony Brook, NY 11794
United States

HOME PAGE: http://sites.google.com/site/danlingjiang

School of Economics and Management, Southwest Jiaotong University ( email )

Chengdu, Sichuan
China

HOME PAGE: http://userweb.swjtu.edu.cn/Userweb/jiangdanling/index.htm

Xiaoming Li (Contact Author)

Massey University - School of Economics and Finance (Albany) ( email )

Private Bag 102904
North Shore
Auckland, 0745
New Zealand
+64 9 4140800 ext. 43177 (Phone)
+64 9 441 8177 (Fax)

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