Short Constraints are Persistent Constraints
41 Pages Posted: 21 Aug 2017
Date Written: August 16, 2017
Short selling constraints predict negative stock returns but the mechanism is not obvious. Negative returns could result from an easing of short constraints, which allows short sellers to correct prices to their expected, unconstrained level. Instead, persistent short constraints predict negative returns because stock owners sell slowly over time while short sellers remain constrained. Persistent short constraints more precisely explain short constraints results in the literature. Our monthly persistent short constraint measure predicts negative returns up to six months later. Our results have implications for understanding the arbitrage mechanisms underlying price efficiency and the regulation of short selling.
Keywords: Securities Lending, Short Selling, Limits to Arbitrage, Anomalies
JEL Classification: G12, G14, G23
Suggested Citation: Suggested Citation