Title: Two Essays on Short Selling and Uptick Rules
Abstract:In this Chapter I use Regulation SHO data from 2005 to investigate the impact of the suspension of uptick rules on stock returns. Consistent with extant theories, the results suggest that on the NYSE,...In this Chapter I use Regulation SHO data from 2005 to investigate the impact of the suspension of uptick rules on stock returns. Consistent with extant theories, the results suggest that on the NYSE, the suspension of the tick-test rule for so called ‘pilot’ stocks mitigates overvaluation in high investor opinion dispersion stocks relative to low investor opinion dispersion stocks. Such overvaluation reduction effect varies depending on the types of stocks; it is mostly driven by small stocks and value stocks. In addition, the results also show that the suspension of uptick rules is not effective in reducing stock overvaluation in stocks with Exchange Traded Options since overvaluation in those stocks has already been mitigated by the introduction of options. On the NASDAQ, however, lifting the bid-test rule goes beyond correcting such overvaluation. It shows that prices of high-dispersion stocks tend to be depressed relative to prices of low-dispersion stocks during the sample period. If such stock undervaluation is driven by “predatory” short sellers’ price manipulation, then the SEC’s recent decision of removing bid-test restrictions for NASDAQ listed securities may not be considered as an optimal policy. In addition, I investigate the relationship between daily short selling activities and stocks returns and find that on average short sellers are more likely to be value-driven “contrarians” who short sell following high stocks returns. The impact of such “contrarians” short selling is more profound in value stocks and large stocks. Although it appears that daily rebalance portfolios consisting of a long position in high-shorting stocks and a short position in low-shorting stocks can generate enormous abnormal returns, I do not interpret this as a feasible investment strategy because a high level of short selling occurs simultaneously with high stock returns. Investing in such a long/short portfolio based on past shorting information is unlikely able to generate any significant abnormal returns.Read More
Publication Year: 2008
Publication Date: 2008-01-01
Language: en
Type: article
Access and Citation
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot