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The dynamics of short sales constraints and market quality: An experimental approach

Juan Cabrera and Eleni Gousgounis

Journal of Financial Markets, 2021, vol. 53, issue C

Abstract: We test the effect of short sale constraints on market quality in an experimental setting. Short sale constrained securities trade at a premium, which is often higher than the difference between the view of the most optimistic investor and the fundamental value. Opinion dispersion contributes to overpricing; this result is more pronounced at the time opinion dispersion is induced. As time progresses, traders update their valuations with information from trading. Consequently, opinion dispersion narrows and its effect on overpricing dissipates. Under short sale constraints, the speed of price adjustment is slower, as prices never fully converge to their fundamental values.

Keywords: Short sale constraints; Opinion dispersion; Market efficiency; Price bubbles; Price discovery; Experimental (search for similar items in EconPapers)
JEL-codes: D40 D82 D83 G12 G14 G18 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.finmar.2020.100549

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Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

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