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Short Sale Constraints, Correlation and Market Efficiency

Author

Listed:
  • Giannikos Christos

    (Baruch College, New York City, USA)

  • Gousgounis Eleni

    (Stevens Institute of Technology, Hoboken, USA)

Abstract

This paper models a market where short sales are prohibited and investors have heterogeneous beliefs on asset values. We show that short sale constraints may cause overpricing, the magnitude of which depends on not only investors’ opinion dispersion on the value of the particular asset, but also on its correlation to other assets, as well as, the investors’ opinion dispersion for the values of those other assets.

Suggested Citation

  • Giannikos Christos & Gousgounis Eleni, 2018. "Short Sale Constraints, Correlation and Market Efficiency," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 18(2), pages 1-18, July.
    • Handle: RePEc:bpj:bejtec:v:18:y:2018:i:2:p:18:n:3
    DOI: 10.1515/bejte-2016-0085
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    References listed on IDEAS

    as
    1. Figlewski, Stephen, 1981. "The Informational Effects of Restrictions on Short Sales: Some Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(4), pages 463-476, November.
    2. Christos I. Giannikos & Eleni Gousgounis, 2012. "Short Sale Constraints and Dispersion of Opinion: Evidence from the Indian Equity Market," The Financial Review, Eastern Finance Association, vol. 47(1), pages 115-143, February.
    3. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
    4. Jarrow, Robert A, 1980. "Heterogeneous Expectations, Restrictions on Short Sales, and Equilibrium Asset Prices," Journal of Finance, American Finance Association, vol. 35(5), pages 1105-1113, December.
    5. Kokonas, Nikolaos & Polemarchakis, Herakles, 2016. "Short sales, destruction of resources, welfare," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 120-124.
    6. J. Michael Harrison & David M. Kreps, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 92(2), pages 323-336.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    short sale constraints; opinion dispersion; correlation; market efficiency;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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