Short-selling Restrictions Research Articles

A Study on the Optimal Portfolio Strategies Under Inflation

AbstractThis paper tests the inflation hedging ability of four categories of important financial assets in China: Commodity futures, real estate, gold and industry stock and select the assets that have significant inflation hedging effect. Then the authors construct the mean-variance model under the inflation factor, using the selected assets to construct the inflation hedging portfolio, solving the model and obtain the optimal investment strategy with inflation protection function. The result shows that the portfolio constructed by the model have more stable real returns and its inflation hedging ability can be even better if the short selling restriction of stocks is eliminated.

When terminal facelift enforces delta constraints

This paper deals with the superreplication of non-path-dependent European claims under additional convex constraints on the number of shares held in the portfolio. The corresponding superreplication price of a given claim has been widely studied in the literature, and its terminal value, which dominates the claim of interest, is the so-called facelift transform of the claim. We investigate under which conditions the superreplication price and strategy of a large class of claims coincide with the exact replication price and strategy of the facelift transform of this claim. In one dimension, we observe that this property is satisfied for any local volatility model. In any dimension, we exhibit an analytical necessary and sufficient condition for this property, which combines the dynamics of the stock together with the characteristics of the closed convex set of constraints. To obtain this condition, we introduce the notion of first order viability property for linear parabolic PDEs. We investigate in detail several practical cases of interest: multidimensional Black–Scholes model, non-tradable assets, and short-selling restrictions.

Predatory Short Sales and Bailouts

This paper extends the literature on predatory short selling and bailouts through a joint analysis of the two. We consider a model with informed short sales and predatory short sales by an uninformed investor, which can trigger the inefficient liquidation of a firm. We obtain several novel results: A commitment to bail out insolvent firms with positive probability can increase welfare because it can selectively deter predatory short selling without hampering desirable informed short sales. Contrasting a common view, bailouts can be optimal ex ante but undesirable ex post. Furthermore, bailouts in our model are a better policy tool than short selling restrictions. Welfare gains from the bailout policy are unevenly distributed: shareholders gain while taxpayers lose. Bailout taxes allow ex-ante Pareto improvements.

The Securities Investment Research and Analysis Based on Genetic Algorithm

With the constant development of the securities market, securities investment is the core topic, and how to choose from a wide range of securities, is always a difficult problem in front of investors. This paper introduces the basic concept of genetic algorithm, to all parts of the genetic algorithm and genetic algorithm based model has made the detailed introduction. Combining genetic algorithm and portfolio, this paper puts forward the model based on genetic algorithm, the securities investment, through carried on the thorough research of securities investment model, and considering the modern portfolio theory in our country is practical, which is based on short-selling restrictions, transaction cost limit and the smallest unit of trading limit proposed portfolio selection model with investment restrictions.

Short-selling bans and institutional investors' herding behaviour: Evidence from the global financial crisis

The literature on short-selling restrictions focusses mainly on a ban's impact on market efficiency, liquidity and overpricing. Surprisingly, little is known about the effects of short-sale constraints on herd behaviour. Since institutional investors have come to dominate mature stock markets and rely extensively on short sales, constraining these traders may influence the asset pricing process. We investigate six stock markets that faced bans during the recent global financial crisis. Our empirical evidence shows that short-selling restrictions exhibit either no influence on herding formation or induce adverse herding. This implies a higher dispersion of returns around the market compared to rational asset pricing, which can be interpreted as an increase in uncertainty among stock market investors.

Institutional Trading and Stock Returns: Evidence from China

Using a unique dataset containing daily institutional ownership information, we examine the relation between daily institutional trading and past, contemporaneous, and future stock returns on the Shanghai Stock Exchange (SSE). We find strong evidence of the price pressure effect induced by institutional trading, causing price impacts of up to 2.12% per day for the most intensively bought stocks. We further find that institutions are informed and momentum traders when buying but not when selling, which may be due to short-selling restrictions in China. Finally, our findings suggest that institutions engage in order splitting and/or herding behavior, as the price pressure effect is observed up to five days before and after the intense trading date.

Short sale constraints, divergence of opinion and asset prices: Evidence from the laboratory

The overvaluation hypothesis (Miller, 1977) predicts that (a) stocks are overvalued in the presence of short selling restrictions and that (b) the overvaluation increases in the degree of divergence of opinion. We design an experiment that allows us to test these predictions in the laboratory. The results indicate that prices are higher with short selling constraints, but the overvaluation does not increase in the degree of divergence of opinion. We further find that trading volume is lower and quoted bid-ask spreads tend to be higher when short sale restrictions are imposed.

Short Selling Restrictions, Transaction Costs, and Stock Returns

Short Selling Restrictions, Transaction Costs, and Stock Returns

Stochastic Pricing Dynamics of Hard-to-Borrow Stocks

The 2010 “Quant of the Year” award from RISK Magazine was given to Marco Avellaneda of New York University for his “groundbreaking work on the effect of short-selling restrictions on price dynamics”. He (with coauthor Mike Lipkin) introduced a new stochastic model that explains unusual pricing peculiarities observed in hard-to-borrow stocks. Because of the extreme brevity of their work, many claims were left unsubstantiated and properties left unexplored. Even to this day, the academic community has not expanded or built on the model. The purpose of this paper is to address this knowledge gap by laying the foundation the model and exploring its fundamental properties. This is done by analyzing both its mathematical properties and its effectiveness using real-world data. This paper is split into three main sections. First, the regulatory landscape for short selling and hard- to-borrow stocks is explored. Second, the model is introduced under the motivation of existing SEC regulations. Several properties are explored including: risk neutral and martingale properties; long-term stability; and options pricing. Finally, the practical application of the model is assessed. This is accomplished though an extensive study of micro pricing data of US securities and a Monte Carlo implementation of the model. This paper concludes that the majority of the claims made in the original paper are mathematically correct. It is also shown that implementing the model is burdened by computational and technical limitations that limit its practical effectiveness. Finally, the data indicates that many pricing phenomenon described by the model are infrequently observed. This leads the author to believe that hard-to-borrow pricing phenomenon is infrequently witnessed in the US stock market. Additional research using generally unobtainable data is needed to sufficiently substantiate this claim.

Existence of financial equilibria with endogenous short selling restrictions and real assets

We consider a model with real assets and restricted participation described by household-specific price-dependent short selling constraints. We show existence of equilibria for all elements in an explicitly characterized large subset of the set of economies.

Worldwide reach of short selling regulations

We characterize legality and incidence of short selling in a worldwide, multimarket framework. Home country short selling restrictions curtail home market stock borrowing by 45% and reduce short selling of the country's American Depository Receipts (ADRs) by 68% due to regulatory reach. Also, the 2008 US ban on short selling of financial firms reduced borrowing in foreign locations. These findings are robust to controls for option availability, enforcement, returns, firm size, trading volume, dividends, ADR level, volatility, days-to-cover, and industry sector. Further, we show that investor conduct resulting from adherence to professional standards is a more powerful mechanism of regulatory reach than intergovernment cooperation.

Short Selling Restrictions in Connection with the Financial Crisis of 2007-09

The aim of this article is to discuss legal solutions and their influence on the functioning of the financial market. These solutions were implemented by regulatory authorities in the United States and at the ministerial level in the European Union in the wake of the financial crisis. To better understand the given problem, the following issues are discussed: the profile of short selling, the theoretical concepts explaining its influence on the capital market, and its regulation on financial markets.

Testing the Effects of Short-Selling Restrictions on Asset Prices

Testing the eects of short-selling restrictions on asset prices is challenging: shifts in stock lending supply, which determine movements on short-selling re- strictions, usually are not observed directly. This paper takes advantage of a unique dataset that contains actual shifts in the lending supply curve for several stocks on the Brazilian market. The dataset comprises daily information from January 2009 to July 2011 from the whole stock lending market in Brazil. The lending-supply shifts vary considerably over time and across stocks, which allows identi…cation of their eects on stock prices. We …nd that short-selling restric- tions generate overpricing and that this eect increases with greater dispersion of investor opinion, consistent with a number of theoretical studies. JEL: G12, C12, G01

Market Declines: What is Accomplished by Banning Short-Selling?

In 2008, U.S. regulators banned the short-selling of financial stocks, fearing that the practice was helping to drive the steep drop in stock prices during the crisis. However, a new look at the effects of such restrictions challenges the notion that short sales exacerbate market downturns in this way. The 2008 ban on short sales failed to slow the decline in the price of financial stocks; in fact, prices fell markedly over the two weeks in which the ban was in effect and stabilized once it was lifted. Similarly, following the downgrade of the U.S. sovereign credit rating in 2011 — another notable period of market stress — stocks subject to short-selling restrictions performed worse than stocks free of such restraints.

Asset Characteristics and Boom and Bust Periods: An Experimental Study

We examine the impact of transaction costs, short selling restrictions and divisibility of assets on market efficiency in experimental asset markets. We find that transaction costs do not exacerbate the inefficiency of the market. They reduce the magnitude of bubbles and push prices closer to fundamentals. More divisible assets exhibit smaller deviations of prices from fundamentals. Short selling restrictions contribute to prolonged bubbles, while relaxing them increases the occurrence of “bust cycles.” We also find that experimental real estate markets display larger deviations of prices from fundamental values, longer boom and bust cycles and smaller turnover than experimental financial markets.

Short Selling and Intraday Price Pressures

We study episodes of significant intraday downward price pressures in individual stocks and find that price declines during such episodes are driven mainly by liquidity demanding nonshort volume. Although short sellers during these price pressure episodes are also active and somewhat exacerbate the magnitude of price declines, their influence on prices is secondary to that of nonshort sellers. As such, our findings are inconsistent with the recently reignited allegations of systematic trading abuses caused solely by short sellers and might shed light on the debate regarding the need to reinstitute short selling restrictions.

Do short selling restrictions destabilize stock markets? Lessons from Taiwan

Short sellers have been routinely blamed for triggering, or exacerbating, stock market declines. The experience of Taiwan provides an interesting case study of the impact of short selling bans on stock returns volatility in a time series framework due to the length of time the short selling ban was in place there. Estimating several variants of an asymmetric GARCH model and a Markov switching GARCH model we find robust evidence that short selling restrictions raise stock returns volatility. The only qualifier is that the impact of short sale bans is a feature of the expansionary phase of business cycles. During recessions this effect dissipates.

Hedge funds and optimal asset allocation: Bayesian expectations and spanning tests

This paper analyzes the contribution of hedge funds to optimal asset allocations between 1993 and 2010. The preferences of specific institutional investors are captured by implementing a Bayesian asset allocation framework that incorporates heterogeneous expectations regarding hedge fund alpha. Mean-variance spanning tests are used to infer the ability of hedge funds to significantly enhance the mean-variance efficient frontier. Further, a novel democratic variance decomposition procedure sheds light on the dynamics in the co-movement of hedge fund returns with a set of common benchmark assets. The empirical findings indicate that portfolio benefits of hedge funds are time-varying and strongly depend on investor optimism regarding hedge funds’ ability to generate alpha. In general, allocations to hedge funds improve the global minimum variance portfolio even after controlling for short-selling restrictions and minimum diversification constraints. However, due to dynamics underlying the composition of the aggregate hedge fund universe, the factor structure of hedge fund returns has become more similar to the benchmark assets over time.

Optimal Positioning in Thailand's Spot and Future Market

This paper examines the intraday price lead-lag relationship between TFEX Index future, single stock future and their underlying cash indices using ten-minute data. Candidate series being traded within TFEX are chosen based on liquidity criteria. Engle-Granger Cointegration is applied to explain bivariate long-run relationship and the Threshold Vector Error Correction Model is practiced to estimate the short-run adjustment parameters. A portfolio is afterward constructed on the basis of pair trading strategy to evaluate the performance of the model and predictability power. Also an alternation of weight ratios putting on the investment of future and cash is done to reduce the risk of wrong positioning. The result suggests that single stock future price movements lead its cash price while the causal relationship between SET50 future and its Index is bi-directional with eventual lead of future price. Arbitrage opportunities present in SET50 future derivative market and have strong impact on the dynamics. Besides, short run trading strategy fails in single stock future market due to low variability in the stock cash price and short-selling restriction. Investment ratio of 70:30 in future and cash perform best in SET50 market and the 100:0 ratios minimize the loss in single stock market.

Worldwide Reach of Short Selling Regulations

We characterize the legality and the incidence of short selling in a worldwide, multimarket framework. Home country short selling restrictions not only curtail home market stock borrowing by 48%, but also reduce short selling of the country’s ADRs by 68% due to regulatory reach. When the U.S. banned short selling in the financial stocks in 2008, regulatory reach also worked in the reverse direction as foreign stock borrowing in these stocks declined. The negative impact of home market restrictions survives in multivariate short selling regressions, which control for option markets, law enforcement, past returns, firm size, trading volume, dividends, ADR level, volatility, days-to-cover, and industry sector. Investor conduct resulting from adherence to professional standards is a more powerful mechanism of regulatory reach than judicial cooperation among countries with working groups such as G7, OECD or EU.