Insider trading regulation and shorting constraints. Evaluating the joint effects of two market interventions.

36 Pages Posted: 22 Jul 2021

See all articles by Robert Merl

Robert Merl

University of Graz

Thomas Stöckl

MCI - The Entrepreneurial School

Stefan Palan

University of Graz

Date Written: July 20, 2021

Abstract

Modern capital markets are subject to many interventions and regulations, some of which curtail the implementation of specific trading strategies in a market. While we understand much of these regulations’ individual effects, the picture is less clear about their joint effects. This paper considers the interaction of two regulations, namely rules limiting shorting of assets and cash, and rules limiting insider trading. For these regulations, prior research shows spikes in short-selling activity around the revelation of insider information, which different studies trace to different causes. Among other results, we find that both allowing short positions and allowing informed trading causes informed traders to increase their market activity and causes mispricing and spreads to diminish. Nevertheless, we find no evidence for significant interaction effects between the two regulations.

Keywords: Insider trading, short positions, regulation, asset market, asymmetric information, experiment

JEL Classification: C92, D82, G10, G12, G14, G40

Suggested Citation

Merl, Robert and Stöckl, Thomas and Palan, Stefan, Insider trading regulation and shorting constraints. Evaluating the joint effects of two market interventions. (July 20, 2021). Available at SSRN: https://ssrn.com/abstract=3890173 or http://dx.doi.org/10.2139/ssrn.3890173

Robert Merl (Contact Author)

University of Graz ( email )

Universitaetsstrasse 15 / FE
A-8010 Graz, 8010
Austria

Thomas Stöckl

MCI - The Entrepreneurial School ( email )

Universitätsstraße 15
Innsbruck, 6020
Austria

Stefan Palan

University of Graz ( email )

Universitaetsstrasse 15/F2
Graz, 8010
Austria
+433163807306 (Phone)

HOME PAGE: http://academic.palan.biz

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