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Short selling, unwinding, and mispricing

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  • Alexander Kempf

Abstract

This article highlights the impact of short selling restrictions and early unwinding opportunities on the relation between futures and spot prices. Within a multiperiod equilibrium model, the influence of optimal arbitrage trading on the mispricing is analyzed. Results concerning trade volume and level, mean reversion, and path dependence of the mispricing are provided. The empirical evidence suggests that short selling restrictions and early unwinding opportunities are influential factors for the mispricing behavior. They help explain empirical findings reported in the literature. © 1998 John Wiley & Sons, Inc. Jrl Fut Mark 18:903–923, 1998

Suggested Citation

  • Alexander Kempf, 1998. "Short selling, unwinding, and mispricing," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 18(8), pages 903-923, December.
    • Handle: RePEc:wly:jfutmk:v:18:y:1998:i:8:p:903-923
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    Cited by:

    1. Shen, Huayu & Zheng, Shaofeng & Xiong, Hao & Tang, Wenjie & Dou, Jiachun & Silverman, Henry, 2021. "Stock market mispricing and firm innovation based on path analysis," Economic Modelling, Elsevier, vol. 95(C), pages 330-343.
    2. Lai, Ya-Wen & Lin, Chiou-Fa & Tang, Mei-Ling, 2017. "Mispricing and trader positions in the S&P 500 index futures market," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 250-265.
    3. Jędrzej Białkowski & Jacek Jakubowski, 2017. "Determinants of Trading Activity on the Single-Stock Futures Market: Evidence from the Eurex Exchange," Working Papers in Economics 17/16, University of Canterbury, Department of Economics and Finance.
    4. Jieye Qin & Christopher J. Green & Kavita Sirichand, 2019. "Determinants of Nikkei futures mispricing in international markets: Dividend clustering, currency risk, and transaction costs," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(10), pages 1269-1300, October.
    5. Pham, Son Duy & Nguyen, Thao Thac Thanh & Do, Hung Xuan, 2022. "Effect of futures trading on the liquidity of underlying stocks: Evidence from Vietnam," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    6. Białkowski, Jędrzej & Perera, Devmali, 2019. "Stock index futures arbitrage: Evidence from a meta-analysis," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 284-294.
    7. Michael McKenzie & Olan T. Henry, 2007. "The Determinnts of Short Selling in the Hong Kong Equities Market," Department of Economics - Working Papers Series 1001, The University of Melbourne.
    8. Edyta Marcinkiewicz, 2016. "Short Sale and Index Futures Mispricing: Evidence from the Warsaw Stock Exchange," Prague Economic Papers, Prague University of Economics and Business, vol. 2016(5), pages 547-559.

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