We study the effect of allowing short selling on the efficiency of the pricing mechanism and the incidence of price bubbles in laboratory asset markets. We report an experiment that illustrates that allowing a sufficiently large short selling capacity results in a substantial reduction in the magnitude and duration of bubbles, but also leads to sustained episodes of busts, during which prices a...

This work is concerned with an optimal selling rule for a large position of stock in a market. Selling a large block of stock in a short period typically depresses the market, which would result in a poor filling price. In addition, the large selling intensity makes the regime more likely to be poor state in the market. In this paper, regime switching and depressing terms associated with sellin...

We examine how constraints on pessimistic trading affect the ability to assess a firm’s likelihood of default using publicly available sources of information. Using cross-country differences in short selling as our primary empirical proxy for the ability of market participants to trade pessimistically, our results indicate that a dynamic multiperiod logit model accurately predicts 18 percentage...

We assess the effect of four short-sale constraints on stock returns in isolation and in combination, in generally falling versus generally rising markets, and considering relative effects for large/mid cap versus small/micro cap firms. We find that across our variety of model specifications, there is substantial evidence that our more fully specified model provides considerable additional expl...

Most stock exchange regulators around the world reacted to the 2007-2009 crisis by imposing bans or regulatory constraints on short-selling. Short-selling restrictions were imposed and lifted at different dates in different countries, often applied to different sets of stocks and featured different degrees of stringency. We exploit this considerable variation in short-sales regimes to identify ...