How does short selling affect liquidity in financial markets?

Benjamin Blau () and Ryan J. Whitby

Finance Research Letters, 2018, vol. 25, issue C, 244-250

Abstract: The paper seeks to determine whether short selling increases or decreases liquidity in U.S. equity markets. On one hand, prior research indicates that short sellers may act, at times, as liquidity providers. On the other hand, other research in market microstructure argues that spreads will widen in the presence of informed traders – a classification generally given to short sellers. Results from a series of new, multivariate time-series tests show that exogenous shocks to short selling activity generally lead to a widening of bid-ask spreads in smaller-cap stocks. The results, however, do not hold for larger-cap stocks.

Keywords: Short sales; Asymmetric information; Liquidity; Bid-ask spreads; Time series; Vector autoregression; Impulse response functions (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:25:y:2018:i:c:p:244-250

DOI: 10.1016/j.frl.2017.10.030

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