Market Frictions continued (short selling) - What do short sale bans do to market quality?
6 important questions on Market Frictions continued (short selling) - What do short sale bans do to market quality?
How might short selling bans affect markets?
- Illiquidity (bid-ask spread): ambiguous
- Measure: bid-ask spread and Amihud measure
- Speed of price discovery: goes down
- Measure: Correlation of individual stock returns with past market returns
- Overpricing: ambiguous
- Excess returns
- (Ban dummies):
- Measure: naked, covered, discolusure
Short selling bans: illiquidity
- Increase: uncertainty about fundamentals
- Decrease: Less informed traders decreases adverse selection
- Increase: Higher inventory risk
Speed of price discovery: goes down
- Negative: (Negative) information is impounded slower
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What are the regression results on liquidity (bid-ask)?
- Bans decrease liquidity
- Disclosure increases liquidity
If you ban naked short selling -> bid-ask increases, liquidity decreases
What are the results of bans on liquidity for size, volatility and options
- Effect is stronger for:
- Small caps
- High volatility
- No options
What are the results on price discovery
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