The asset allocation for a global stock portfolio will be affected by the distribution of asset returns. Structural market features can drive distributional characteristics, so it is important to understand the uniqueness of each market. Short-selling restrictions are an important structural feature. If there are restrictions on short-selling, there can be a noticeable impact on price behavior. The efficiency of markets will be affected by the inability of market participants to sell stocks. For example, the speed of adjustment of prices to bad information may be hindered with short selling restrictions.
The regulatory rules for short-selling differ across countries especially once you enter emerging markets. Research has found a noticeable difference in the distributional characteristics of those markets which have restrictions on short selling. In general, those countries with short selling restrictions have less negative skewness than those which allow short selling. See “efficiency and the Bear: Short Sales and Markets Around the World” Arturo Bris, William Goetzmann and Ning Zhu in the Journal of Finance June 2007.
The authors were able to look at both cross-sectional and time series data to show the impact of short selling restrictions. What is most interesting about their work is the comparison of stock which are dual listed in the US and UK where there is short selling versus behavior in their home countries where there are restrictions. This test comparison clearly shows a difference in the distributional characteristics.
This work is a nice warning to anyone who engages in quantitative analysis that a careful review of the structural environment is needed before investing.
No comments:
Post a Comment