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Effect of Short Selling on Market Liquidity, Price, and Volatility: A Dynamic Perspective

Author

Listed:
  • Soonho Kim

    (Pukyong National University Business School)

Abstract

In order to verify the effect of short selling activities on market efficiency, volatility, and price, I conduct the Granger causality test, impulse response analysis, and variance decomposition using a vector autoregressive model. Empirical tests show that short selling enhances market efficiency by reducing trading costs. On the other hand, short selling does not significantly increase stock volatility or decrease prices. This study verifies that short selling improves market quality without a negative effect on volatility and price.

Suggested Citation

  • Soonho Kim, 2020. "Effect of Short Selling on Market Liquidity, Price, and Volatility: A Dynamic Perspective," Economics Bulletin, AccessEcon, vol. 40(4), pages 3140-3146.
    • Handle: RePEc:ebl:ecbull:eb-20-00799
    as

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    References listed on IDEAS

    as
    1. Arturo Bris & William N. Goetzmann & Ning Zhu, 2007. "Efficiency and the Bear: Short Sales and Markets Around the World," Journal of Finance, American Finance Association, vol. 62(3), pages 1029-1079, June.
    2. Pedro A. C. Saffi & Kari Sigurdsson, 2011. "Price Efficiency and Short Selling," The Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 821-852.
    3. Ekkehart Boehmer & Juan (Julie) Wu, 2013. "Short Selling and the Price Discovery Process," The Review of Financial Studies, Society for Financial Studies, vol. 26(2), pages 287-322.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    short selling; market efficiency; volatility; stock price;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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