Constraints on short-selling and asset price adjustment to private information

Diamond, Douglas W.; Verrecchia, Robert E.

doi:10.1016/0304-405x(87)90042-0

Cited by 1,563 publications

(1,045 citation statements)

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“…2 For theoretical models on how short-sale constraints can lead to overvaluation, speculative trading, and bubbles, see, for example, Miller (1977), Harrison and Kreps (1978), Scheinkman and Xiong (2003), and Hong and Stein (2003). Diamond and Verrecchia (1987) show theoretically that a market with short-sale constraints incorporates information more slowly than a market in which short sales are not restricted. Empirical evidence that short sellers contribute to market efficiency and market quality can be found in, among others, Dechow, Hutton, Meulbroek, and Sloan (2001), Desai, Krishnamurthy, and Kumar (2006), Bris, Goetzmann, and Zhu (2007), Chang, Cheng, and Yu (2007), Boehmer, Jones, and Zhang (2008), Saffi and Sigurdsson (2011), and Boehmer and Wu (2013).…”

Section: Introductionmentioning

confidence: 99%

Predatory Short Selling

Brunnermeier

Oehmke

2013

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Financial institutions may be vulnerable to predatory short selling. When the stock of a financial institution is shorted aggressively, leverage constraints imposed by short-term creditors can force the institution to liquidate long-term investments at fire sale prices. For financial institutions that are sufficiently close to their leverage constraints, predatory short selling equilibria co-exist with no-liquidation equilibria (the vulnerability region) or may even be the unique equilibrium outcome (the doomed region). Increased coordination among short sellers expands the doomed region, where liquidation is the unique equilibrium. Our model provides a potential justification for temporary restrictions on short selling of vulnerable institutions and can be used to assess recent empirical evidence on short-sale bans.

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Section: Introductionmentioning

confidence: 99%

Predatory Short Selling

Brunnermeier

Oehmke

2013

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“…Williams (1977) argues heterogeneous beliefs reflect uncertainty and thus proxy for a risk factor, so that future returns should be positively related to belief differences. Diamond and Verrecchia (1987) and Hong et al (2000) argue that heterogeneous beliefs will not affect stock prices in the presence of rational arbitrageurs or market makers, though Shleifer and Vishny (1997) discuss the practical limits to arbitrage.…”

Section: Methodsmentioning

confidence: 99%

The relationship between the option-implied volatility smile, stock returns and heterogeneous beliefs

Feng

Zhang

Friesen

2015

International Review of Financial Analysis

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“…For example, Diamond and Verrecchia (1987) and Easley and O'Hara (1992) consider the consequences of short-sale constraints on asset price and volume. They show that the inability to short sell may induce a strong positive correlation between price and volume, and that the absence of trade signals the existence of new (negative) information that may be useful to investors.…”

Section: Iia Economic Setting and Model Specificationmentioning

confidence: 99%

“…There are no dealers in commercial property markets to smooth inventory imbalances, and short selling is difficult to achieve. Interestingly, these market microstructure differences may serve to intensify positive short-term supply-price relations as compared to exchangetraded financial assets (see, for example, Diamond and Verrecchia (1987) and Easley and O'Hara (1992) for analysis of the effects of short-sale constraints on the price-volume relation).…”

mentioning

confidence: 99%