Dynamic short‐sale constraints, price limits, and price dynamics
Purpose – The purpose of this paper is to take advantage of a natural experiment in Taiwan to test the effect of short‐sales constraints on price dynamics.Design/methodology/approach – Since September 1998, short‐selling is banned at a price below the close price of the previous trading day. The new rule creates unique daily dynamics of short‐sales constraints. The paper employs a difference‐in‐difference method to evaluate whether the short‐sales constraint rule plays an important role in the price dynamics.Findings – The results show that stock prices react to information in a way similar to if short‐selling was not banned. This is in line with the implication of a rational expectation framework like Diamond and Verrecchia.Research limitations/implications – The paper has implications on the short selling bans in the 2008/2009 credit crisis and the European debt crisis because the bans are public information as those in this setting. The rational agents in the market could incorporate the bans into pric...