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Hide and Seek: Uninformed Traders and the Short-sales Constraints

Jinghan Cai (), Chiu Ko (), Yuming Li () and Le Xia ()
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Jinghan Cai: Department of Economics and Finance, The University of Scranton
Chiu Ko: Department of Economics, National University of Singapore
Yuming Li: School of Business and Economics, California State University
Le Xia: Research Department, BBVA, Hong Kong

Annals of Economics and Finance, 2019, vol. 20, issue 1, 319-356

Abstract: We examine the effect of short selling via the unique setting in the Hong Kong stock market and find that, when a stock becomes shortable, its trading activities decrease, liquidities worsen, and information asymmetries increase. This finding contradicts both the existing theoretical models, and recent empirical studies using global financial crisis data. We extend the sequential trading model with short-sales constraints of one asset by Diamond and Verrecchia (1987) to the case of multiple assets. The model predicts that our empirical results are due to uninformed traders quitting from trading the shortable securities.

Keywords: Short-sales constraint; Liquidity; Information asymmetry; Microstructure (search for similar items in EconPapers)
JEL-codes: G14 G15 (search for similar items in EconPapers)
Date: 2019
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