A Study of Market-Wide Short-Selling Restrictions Report as inadecuate

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This paper contributes empirical evidence to the on-going debate on short sales. Ourexamination of how market-wide short-sale restrictions affect aggregate market returnsfocuses on two main questions: What is the effect of short-sale restrictions on skewness, volatility, the probability of market crashes, and liquidity? What is the effect on the market expected return or cost of capital? We report new data on the history of short-selling and putoption trading regulations and practices from 111 countries, and create a short-selling feasibility indicator for the analysis of stock market indices around the world. We find that when short-selling is possible, aggregate stock returns are less volatile and there is greater liquidity. When countries start to permit short-selling, aggregate stock price increases,implying lower a cost of capital. There is no evidence that short-sale restrictions affect either the level of skewness of returns or the probability of a market crash. Collectively, our empirical evidence suggests that allowing short-selling enhances market quality.

Keywords: Short-sale constraints ; Stock returns ; Cost of capital ; International finance

Subject(s): Financial Economics

Issue Date: Jun 16 2009

Publication Type: Working or Discussion Paper

PURL Identifier: http://purl.umn.edu/51180

Total Pages: 43

JEL Codes: G15; G12

Series Statement: Working Paper

WP 2009-21

Record appears in: Cornell University > Department of Applied Economics and Management > Working Papers

Author: Charoenrook, Anchada ; Daouk, Hazem

Source: http://ageconsearch.umn.edu/record/51180?ln=en

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