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

See all articles by Pedro Saffi

Pedro Saffi

University of Cambridge - Judge Business School

Kari Sigurdsson

Schroders Investment 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

Schroders Investment Management ( email )

31 Gresham Street
London, EC2V 7QA
United Kingdom

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