Impact of short-sales in stock market efficiency

Bàrbara Llacay () and Gilbert Peffer
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Bàrbara Llacay: Centre Internacional de Mètodes Numèrics en Enginyeria (CIMNE), Campus Nord UPC,, Postal: Gran Capità, s/n, 08034 Barcelona, Spain
Gilbert Peffer: Department of Economic, Financial, and Actuarial Mathematics, Faculty of Economics and Business, University of Barcelona, Postal: Av. Diagonal 690, 08034 Barcelona, Spain

Algorithmic Finance, 2019, vol. 8, issue 1-2, 5-26

Abstract: In the last two decades, the hedge fund sector has experienced a spectacular growth, up to the point that it is currently estimated to move more than 50% of the daily volume of stock markets. In contrast to other financial institutions, hedge funds are subject to less restrictive regulations which, in particular, allow them to sell short. As they exploit the asset mispricings, their action is thought to contribute to market efficiency. In this paper we aim at studying the impact that short sales have on the informational efficiency of a financial market. This can be used not only to assess the effect that hedge fund actions have in financial markets, but also the consequences of regulatory measures such as short-selling restrictions or bans. Building on an agent-based market, the simulation results indicate that short sales are beneficial to market efficiency, although the market does not become completely efficient even when all the population can sell short.

Keywords: Agent-based simulation; financial markets; market efficiency; short-selling JEL Classification: C63; G1; G11; G14; G17 (search for similar items in EconPapers)
JEL-codes: C00 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:ris:iosalg:0073

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