The Impact of Short-Selling Constraints on Financial Market Stability in a Heterogeneous Agents Model
Mikhail Anufriev () and
Jan Tuinstra ()
No 3, Working Paper Series from Economics Discipline Group, UTS Business School, University of Technology, Sydney
Recent turmoil on global fi nancial markets has led to a discussion on which policy measures should or could be taken to stabilize financial markets. One such a measure that resurfaced is the imposition of short-selling constraints. It is conjectured that these short-selling constraints reduce speculative trading and thereby have the potential to stabilize volatile financial markets. The purpose of the current paper is to investigate this conjecture in a standard asset pricing model with heterogeneous beliefs. We model short-selling constraints by imposing trading costs for selling an asset short. We find that the local stability properties of the fundamental rational expectations equilibrium do not change when trading costs for short-selling are introduced. However, when the asset is overvalued, costs on short-selling increase mispricing and price volatility.
Keywords: asset pricing model; heterogeneous beliefs; financial instability; short-selling bias (search for similar items in EconPapers)
JEL-codes: C62 G12 G18 (search for similar items in EconPapers)
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Journal Article: The impact of short-selling constraints on financial market stability in a heterogeneous agents model (2013)
Working Paper: The impact of short-selling constraints on financial market stability in a heterogeneous agents model (2013)
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