Efficiency and the Bear: Short Sales and Markets around the World

Posted: 23 Jan 2006

See all articles by Arturo Bris

Arturo Bris

IMD International; European Corporate Governance Institute (ECGI); Yale University - International Center for Finance

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Ning Zhu

China Academy of Financial Research (CAFR); Yale School of Management; University of California, Davis - Graduate School of Management

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Abstract

We analyze cross-sectional and time series information from forty-six equity markets around the world to consider whether short sales restrictions affect the efficiency of the market and the distributional characteristics of returns to individual stocks and market indices. We construct two measures of price efficiency that quantify the asymmetric response of individual stock returns to negative vs. positive information, and find some evidence that prices incorporate negative information faster in countries where short sales are allowed and practiced. This evidence is consistent with more efficient price discovery at the individual security level. A common conjecture by regulators is that short sales restrictions can reduce the relative severity of a market panic. We test this conjecture by examining the skewness of market returns. We find strong evidence that in markets where short selling is either prohibited or not practiced, market returns display significantly less negative skewness. However, at the individual stock level, short sales restrictions appear to make no difference.

Keywords: Short Sales, Market Efficiency, Market Crashes

JEL Classification: F36, G15, G28

Suggested Citation

Bris, Arturo and Goetzmann, William N. and Zhu, Ning, Efficiency and the Bear: Short Sales and Markets around the World. Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=877749

Arturo Bris (Contact Author)

IMD International ( email )

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European Corporate Governance Institute (ECGI)

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Yale University - International Center for Finance ( email )

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William N. Goetzmann

Yale School of Management - International Center for Finance ( email )

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National Bureau of Economic Research (NBER)

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Ning Zhu

China Academy of Financial Research (CAFR)

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China

Yale School of Management ( email )

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University of California, Davis - Graduate School of Management ( email )

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HOME PAGE: http://www.gsm.ucdavis.edu/Faculty/Zhu/

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