Dynamic Asset Pricing with Interactions between Short-Sale and Borrowing Constraints

Macquarie University Faculty of Business & Economics Research Paper

Review of Asset Pricing Studies, forthcoming

52 Pages Posted: 16 Aug 2018 Last revised: 16 Dec 2020

See all articles by Lei Shi

Lei Shi

Macquarie University; Financial Research Network (FIRN)

Yajun Xiao

University College Dublin (UCD)

Date Written: August 3, 2018

Abstract

This paper studies the joint effect of borrowing and short-sale constraints under heterogeneous beliefs and risk aversions. Although the constraints never bind simultaneously in equilibrium, there is interesting economics in the anticipatory effects of potentially future binding constraints. In particular, the risk-free rate and Sharpe ratio experience endogenous jumps at a critical state, where two equilibria co-exist. Moreover, a short-sale ban can lead to a lower stock price and higher volatility depending the
relative tightness between the constraints, and tightening the borrowing constraint during a short-sale ban can also make returns more volatile.

Keywords: Heterogeneous Investors; Borrowing Constraints; Short-Sale Constraints; Volatility; Regime Switch

JEL Classification: C61; D51; G11; G12

Suggested Citation

Shi, Lei and Xiao, Yajun, Dynamic Asset Pricing with Interactions between Short-Sale and Borrowing Constraints (August 3, 2018). Macquarie University Faculty of Business & Economics Research Paper, Review of Asset Pricing Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=3225517 or http://dx.doi.org/10.2139/ssrn.3225517

Lei Shi (Contact Author)

Macquarie University ( email )

New South Wales 2109
Australia
+612 98508478 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Yajun Xiao

University College Dublin (UCD) ( email )

Belfield, Dublin 4 4
Ireland

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