Wednesday, July 16, 2014
Vijay Singal and Jitendra Tayal have posted Does Unconstrained Short Selling Result in Unbiased Security Prices? Evidence from Futures Markets on SSRN with the following abstract:
We examine whether unconstrained short selling can result in unbiased security prices. Since constraints on short selling cannot be eliminated in equity markets, we use trades from futures markets where there is no distinction between short positions and long positions. We find that in those markets, even with unconstrained short selling, there is an upward bias in prices around weekends. The bias is stronger in periods of high volatility when short sellers are unwilling to accept higher levels of risk. On the other hand, riskiness of long positions does not seem to have a similar impact on prices. Thus, evidence in the paper shows that security prices may be biased upwards even without constraints on short selling, with greater overvaluation in the more volatile securities.