Abstract
We use a natural experiment occurred on Hong Kong stock market to examine the effects of removing short sales constraints on several trading characteristics of underlying stocks. We find that the trading of underlying stocks become less active after the lift of short sales constraints; meanwhile the liquidity of underlying stocks is tightened and the information asymmetry among the investors aggravates. But we fail to find any evidence indicating that the lift of short sales constraints seriously destabilizes the market. We further provide a story of noise traders to explain these empirical findings.
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