Short-Sales Constraints and Price Discovery: Evidence from the Hong Kong Market

48 Pages Posted: 19 Jul 2004

See all articles by Eric C. Chang

Eric C. Chang

University of Hong Kong - School of Business

Yinghui Yu

Singapore University of Social Sciences

Date Written: March 15, 2004

Abstract

The unique short-sales restrictions present in the Hong Kong stock market, where a list of designated securities that can be sold short is revised from time to time, provide valuable data for examining the effects of short-sales constraints on market efficiency, especially efficiency in price discovery. By analyzing the cumulative abnormal returns around the lifting and reinstatement of short-sales restrictions, we find that short-sales constraints tend to cause stock overvaluation and that the overvaluation effect is more dramatic for individual stocks where wider dispersion of investor opinions exist. The evidence suggests that eliminating short-sales restrictions helps improve the efficiency of price discovery, which is consistent with Miller (1977)'s intuition. We also find that when short sales are allowed, individual stock return exhibits higher volatility and less positive skewness.

Keywords: Short-sales constraints, Price discovery, Hong Kong

Suggested Citation

Chang, Eric Chieh C. and Yu, Yinghui, Short-Sales Constraints and Price Discovery: Evidence from the Hong Kong Market (March 15, 2004). EFA 2004 Maastricht Meetings Paper No. 3641. Available at SSRN: https://ssrn.com/abstract=565330 or http://dx.doi.org/10.2139/ssrn.565330

Eric Chieh C. Chang (Contact Author)

University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Yinghui Yu

Singapore University of Social Sciences ( email )

463 Clementi Road
599494
Singapore

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