Finance Seminar with Hong Liu, Washington University St. Louis

The Department of Finance is proud to announce the upcoming seminar with Hong Liu, Olin Business School, Washington University in St. Louis

Hong Liu will present:

Short-sale Constraints, Bid-Ask Spreads, and Information Acquisition

Authors:

Hong Liu, Olin Business School, Washington University in St. Louis and CAFR
Yajun Wang, Robert H. Smith School of Business, University of Maryland

Abstract:

Short-sale constraints are prevalent in many financial markets and have been actively adjusted by regulators to tackle various problems in markets. However, theories of the impact of short-sale constraints on market liquidity and information quality are largely absent. In this paper, we extend Liu and Wang (2013) to study this impact in the presence of information asymmetry, inventory risk, and imperfect competition among market makers. In contrast to Diamond and Verrecchia (1987), we show that shortsale ban decreases bid price, increases ask price, implying an increase in bid-ask spread. In addition, short-sale constraints increase the volatility of bid-ask spreads. The presence of asymmetry information can further magnify the adverse impact of short-sale constraints on market liquidity. On the other hand, the presence of shortsale constraints may increase investors’ incentive to produce more precise information and thus improve aggregate information quality.

Location:

Solbjerg Plads 3, 2000 Frederiksberg
SP212