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Short Constraints are Persistent Constraints

41 Pages Posted: 21 Aug 2017  

Jesse Blocher

Vanderbilt University - Finance

Chi Zhang

University of Massachusetts Lowell

Date Written: August 16, 2017

Abstract

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

Blocher, Jesse and Zhang, Chi, Short Constraints are Persistent Constraints (August 16, 2017). Available at SSRN: https://ssrn.com/abstract=3020309

Jesse Blocher (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Chi Zhang

University of Massachusetts Lowell ( email )

Pulichino Tong Building
Manning School of Business
Lowell, MA 01854
United States

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