Asset Pricing Implications of Short-sale Constraints in Imperfectly Competitive Markets

Prof. Liu Hong

Professor of Finance
Washington University in St.Louis

About the Speaker

Professor Liu Hong is currently Professor of Finance in Washington University in St. Louis, where he has been Academic Director of the Master of Science in Finance Program since 2008. Professor Liu’s research areas include optimal consumption and investment with frictions, asset pricing, and market microstructure. He has published in Journal of Finance,Journal of Financial Economics, Review of Financial Studies, Journal of Economic Theory, and other leading academic journals. Professor Liu is the recipient of Management Science Distinguished Service Award (2013), TCFA Best Paper in Investment (2013), TCW Best Paper Award (2011), etc. Professor Liu has also been on the editorial board of top international journals, including Review of Finance and Management Science.

He is visiting RMI from 2 June to 15 June 2016 as the NUS-RMI Professor in Risk Management.

About the Seminar

We study the impact of short-sale constraints on market prices and liquidity in imperfectly competitive markets where market makers have significant market power. We show that with or without information asymmetry, short-sale constraints decrease bid, bid depth and trading volume, but increase bid-ask spread and its volatility. If market makers are risk averse, short-sale constraints also increase ask and decrease ask depth. In addition, the impact of short-sale constraints can increase with market transparency. Our results are largely unaffected by endogenization of information acquisition and information revelation.

This is a joint work with Yajun Wang from University of Maryland.