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Insider trading regulation and shorting constraints. Evaluating the joint effects of two market interventions

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  • Merl, Robert
  • Stöckl, Thomas
  • Palan, Stefan

Abstract

Modern capital markets are subject to many interventions and regulations, some of which curtail the implementation of specific trading strategies in a market. While we understand much of these regulations’ individual effects, the picture is less clear about their joint effects. This paper considers the interaction of two regulations, namely rules limiting shorting of assets and cash, and rules limiting insider trading. For these regulations, prior research shows spikes in short-selling activity around the revelation of insider information, which different studies trace to different causes. Among other results, we find that both allowing short positions and allowing informed trading causes informed traders to increase their market activity and causes mispricing and spreads to diminish. Nevertheless, we find no evidence for significant interaction effects between the two regulations.

Suggested Citation

  • Merl, Robert & Stöckl, Thomas & Palan, Stefan, 2023. "Insider trading regulation and shorting constraints. Evaluating the joint effects of two market interventions," Journal of Banking & Finance, Elsevier, vol. 154(C).
    • Handle: RePEc:eee:jbfina:v:154:y:2023:i:c:s0378426622000899
    DOI: 10.1016/j.jbankfin.2022.106490
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    More about this item

    Keywords

    Insider trading; Short positions; Regulation; Asset market; Asymmetric information; Experiment;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G40 - Financial Economics - - Behavioral Finance - - - General

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