Asset Pricing Implications of Short-sale Constraints in Imperfectly Competitive Markets
نویسندگان
چکیده
We propose an equilibrium model to study the impact of short-sale constraints on market prices and liquidity in imperfectly competitive markets where market makers have significant market power and are averse to inventory risk. We show that shortsale constraints decrease bid because of the market power and increase ask because of the risk aversion. Our model can therefore help explain why short-sale constraints tend to increase bid-ask spread. In addition, short-sale constraints also decrease quote depths and trading volume, but increase volatility of bid-ask spreads. The adverse impact of short-sale constraints on market prices and liquidity is greater in more transparent markets. Our results are largely unaffected by endogenization of information acquisition. JEL Classification Codes: G11, G12, G14, D82.
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