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Stabilizing the market with short sale constraint? New evidence from price jump activities |
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| Institution: | 1. Department of Finance, National Central University, Taiwan;2. Booth School of Business, University of Chicago, USA;1. Escuela de Negocios, Universidad Adolfo Ibáñez, Diagonal Las Torres 2640 Office 533-C, 7941169, Peñalolén, Santiago, Chile;2. Financial Regulation Center – CREM, Faculty of Economics and Business, Universidad de Chile, Santiago, Chile;1. Istituto per le Applicazioni del Calcolo M. Picone, CNR, Via Amendola 122/D, 70126 Bari, Italy;2. Dipartimento di Scienze Economiche e Aziendali, Università di Sassari, Via Muroni 25, 07100 Sassari, Italy |
| Abstract: | We re-examine the impact of short-sale constraints (SSC) on market stabilization via realized jump activities during 2002–2009 to circumvent the reverse causality in identifying the policy effects of SSC. We observed that the abnormal downturns under tighter short sale constraints are significantly larger whereas there is no difference for abnormal upturns. Our empirical results survive across a sequence of robustness examinations controlled for market illiquidity. The findings do not support the claims by regulators that restraining short-sales can stabilize prices; instead, SSC has led to a less efficient market with stronger extreme downward returns. |
| Keywords: | Short sale constraint Market stabilization Put-call-parity Jump intensity Jump size Liquidity |
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