dc.description.abstract | Abstract
This dissertation contains two essays for discussing the effects of short sale constraints (SSC) on market efficiency and market stability. We take advantage of a natural experimental environment provided by the imposition of various short-sales policy regimes between 2002 and 2009 in the Taiwan stock market. In the first essay, we examine the put-call parity-defined price deviations in an attempt to assess the efficiency of price adjustments, and find that more extreme constraints lead to asymmetric and delay adjustment speed even when market conditions and liquidity are controlled.
Interestingly, in our counterfactual analysis, short-sales bans help to prevent price collapse, nonetheless, we find that the tightening of short-sales restrictions leads to increases in both market volatility and downside risk. We also occasionally found that there is an overlooked endogeneity among previous literature on the stabilization effect of short sale constraints in that regulator usually restrict short-selling to prevent market abnormal movements when the market volatility is particularly high. Therefore, a period of high price variation per se (as it can be the cause instead of the consequence) does not preclude the stabilizing effectiveness of the SSC.
To resolve the picture, in our second essay, we thus control for the endogeneity concerns by probing the jump activities under SSC using a jump identification approach by Barndorff-Nielsen and Shephard (2004) and Huang and Tauchen (2005). We observed that the abnormal downturns under tighter short sale constraints are significantly larger whereas there is no difference for abnormal upturns across different short-sale regimes.
Both of the two essays do not support the claims by regulators that restraining short-sales can stabilize prices; instead, SSC has led to a more volatile and less efficient market.
First Essay
Market Efficiency, Stability and Short Sales Constraints: Evidence from Taiwan
Market efficiency under short-sales constraints has long been an issue of debate within the related literature. In this study, we take advantage of a natural experimental environment provided by the imposition of various short-sales policy regimes between 2002 and 2009 in the Taiwan stock market. We examine the put-call parity-defined price deviations in an attempt to assess the efficiency of price adjustments, and find that more extreme constraints lead to asymmetric adjustment rates in upward and downward convergence to theoretical price; although short-sales constraints are generally found to suppress the effects of negative information on prices, our application of a ‘threshold error correction model’ (TECM) reveals more rapid convergence to theoretical price from upward adjustments than downward adjustments. Furthermore, price efficiency is found to be improved when such constraints are relaxed. These results hold even when market conditions and liquidity are controlled. Interestingly, although evidence from our counter-factual analysis suggests that tighter constraints help to prevent price collapse, despite the fact that prices may fall more sharply without short-sales bans, our findings refute the claim that tighter constraints can help to stabilize the market. Instead, we find that the tightening of short-sales restrictions leads to increases in both market volatility and downside risk.
Keywords: Short Sale Constraints, Price Efficiency, Market Stabilization, Put-call Parity, Threshold Error Correction Model, Counterfactual Analysis
Second Essay
Stabilizing the Market with Short Sale Constraint?
New Evidence from Price Jump Activities
This essay re-examine the impact of short-sale constraints (SSC) on market stabilization via realized jump activities during 2002~2009 to circumvent the reverse causality in identifying the policy effects of SSC. We observed that the abnormal downturns under tighter short sale constraints are significantly larger whereas there is no difference for abnormal upturns across different short-sale regimes. The findings do not support the claims by regulators that restraining short-sales can stabilize prices; instead, SSC has led to a more volatile and less efficient market
Keywords: short sale constraint, market stabilization, put-call-parity, jump activity
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