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Price Efficiency and Short Selling

AFA 2008 New Orleans Meetings Paper

IESE Business School Working Paper No. 748

Review of Finance Studies, Vol. 24, No. 3, pp. 821-852, 2011

41 Pages Posted: 4 Dec 2006 Last revised: 7 Mar 2011

Pedro A. C. Saffi

University of Cambridge - Judge Business School

Kari Sigurdsson

AQR Capital Management

Date Written: August 30, 2010

Abstract

This article studies how stock price efficiency and the distribution of returns are affected by short-sale constraints. The study is based on a global data set that includes more than 12,600 stocks from 26 countries between 2005 and 2008. Our main findings are as follows. First, lending supply has a significant impact on efficiency. Stocks with higher short-sale constraints, measured by low lending supply, have lower price efficiency. Second, relaxing short-sales constraints is not associated with an increase in either price instability or occurrence of extreme negative returns.

Keywords: Short sales constraints, market efficiency, equity lending markets, extreme returns

JEL Classification: G12, G14, G15

Suggested Citation

Saffi, Pedro A. C. and Sigurdsson, Kari, Price Efficiency and Short Selling (August 30, 2010). AFA 2008 New Orleans Meetings Paper; IESE Business School Working Paper No. 748; Review of Finance Studies, Vol. 24, No. 3, pp. 821-852, 2011. Available at SSRN: https://ssrn.com/abstract=949027

Pedro A. C. Saffi (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

HOME PAGE: http://www.pedrosaffi.com

Kari Sigurdsson

AQR Capital Management ( email )

United Kingdom

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