Informed trading with a short-sale prohibition

Research output: Contribution to journalArticlepeer-review

Abstract

Using a rational expectations equilibrium framework, I evaluate the effects of a short-sale prohibition in an economy with asymmetrically informed investors who are identical except for their information sets. Relative to an economy in which short selling is permitted, the financial market is less informationally efficient under a short-sale ban even when the ban is not binding. This alters the risk-sharing environment and leads to an increase in information acquisition. Additionally, a short-sale prohibition increases market depth. Imposing a cost on short selling instead of a strict prohibition yields similar results. Novel empirical implications are identified.

Original languageEnglish (US)
Pages (from-to)1803-1824
Number of pages22
JournalManagement Science
Volume67
Issue number3
DOIs
StatePublished - Mar 2021

All Science Journal Classification (ASJC) codes

  • Strategy and Management
  • Management Science and Operations Research

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