Hedged.Biz

  • Disclaimer
  • About Us
  • Articles
  • Home
  • Articles
  • Short Selling and Market Efficiency
May 9, 2025

Short Selling and Market Efficiency

Short Selling and Market Efficiency

by Burnham Banks / Thursday, 25 September 2008 | 8:15 am / Published in Articles
image_pdfimage_print

A few interesting findings about short selling:

1. There is evidence in short selling activity consistent with information leakage and front-running. (Do Short Sellers Front-Run Insider Sales? Khan and Lu, June 2008.)

2. Short selling restrictions tend to be effective against negative skewness at market level but not at individual stock levels. (Efficiency and the Bear: Short Sales anad Markets around the World, September 2004, Bris, Goetzmann and Zhu.)

3. Where short sales are possible, aggregate stock returns are less volatile and there is greater liquidity. When countries start to permit short-selling, aggregate stock price increases, implying a cost of capital. There is no evidence that short-sale restrictions affect either the level of skewness of returns or the probability of a market crash. (A Study of Market-Wide Short-Selling Restrictions Jan 2005, Caroenrook and Daouk.)

4. While short-sellers take larger positions in stocks with recent price declines than in stocks with recent price increases, when the analysis is conditional on accounting-based measures of fundamental value, the positions of short-sellers in stocks with price declines are concentrated in stocks that are overvalued relative to fundamentals. (Does short-selling amplify price declines or align stocks with their fundamental values? May 2008, Curtis and Fargher.)

5. Stocks with limited lending supply and high borrowing fees respond more slowly to market shocks. Second, short-sale constraints have a small impact on the distribution of weekly stock returns. Limited lending supply is associated with higher skewness, but not with fewer extreme negative returns. Third, stocks with limited lending supply and higher borrowing fees are associated with lower R2s on average. (Price Efficiency and Short Selling, January 2008. Saffi and Sigurdsson.)

Point 1 above is interesting. It implies that someone somewhere has asymmetric (superior) information and at least some of these are short sellers.
Points 3, 4, 5 all point to greater market efficiency where short selling is permitted.
Point 2 implies that short selling has some negative impact on market returns but not on efficient pricing at the stock level. Measures that slow the momentum of short selling may correct some of the negative skewness without taking away too much from the market efficiency. An uptick rule would likely widen bid offer spreads as well as encourage smaller but more frequent trades.

Ten Seconds Into The Future

“Hello. I’m Burnham Banks and I studied economics in the late 80s and early 90s. I’m still studying economics today and am still no wiser. This blog is a journal, a record of my thoughts and experiences. If we are destined to repeat our mistakes, we should at least repeat them faithfully. If not, then perhaps the past is a mischievous guide and we should try something new.”

Meta

  • Entries RSS

Featured Posts

  • Long short, hedging and market neutrality under unruly markets

  • Ten Seconds Never Felt So Long. 2025 Trade War.

  • Tariff Wars. The Best Response to Tariffs is to Cut One’s Own.

  • 2025 Geo Macro Scenario A

  • Fiction. Foundation CG. 2025 02

  • Thoughts from the Bar Stool. 2025 02

  • Trump. Vichy. Lebensraum.

  • FICTION. Ten Seconds Into The Future 2025

  • A Few Thoughts about AI

  • Ten Seconds into 2025. This is Thin…

  • Efficiency X Robustness and Other Tradeoffs

  • The Longevity Imperative

  • China Reflation Policy 2024

  • Three Big Themes, Investable or Not.

  • Fiction. Free Energy. Expropriation risk. Governance.

  • Fiction?: Matter and Interactions.

  • Blended Finance 1.0.1

  • Ten Second Into The Future 2024

  • Blended Finance 1.1

  • Environmental and Social Imperatives

  • Environment and Social Impact. Public Goods. Private Capital?

  • FICTION. Males are Alien Viruses. XY and XX.

  • Impact Investing 0.5

  • Ten Seconds Into The Future. 2023 Outlook.

  • The Fool.

Categories

  • Articles

Archives

  • RSS FEED

Copyright 2018 © Hedged.Biz All rights reserved

TOP