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The Informational Effects of Restrictions on Short Sales: Some Empirical Evidence

  • Stephen Figlewski


In a world of heterogeneous investors, a competitive financial market has two major functions. First, it is the mechanism by which ownership of the existing supply of risky assets is distributed among investors. This is the role which is analyzed in detail by the standard Capital Asset Pricing Model (CAPM) and its many extensions. The second important market function is to aggregate the diverse information held by different investors into a single price. Most versions of the CAPM eliminate the information aggregation function by assuming that investors hold homogeneous beliefs with respect to the probability distribution of asset returns. Exceptions which deal with some aspects of the problem are Lintner [7], Grossman [4], Grossman and Stiglitz [5], and Figlewski [1, 3 ].



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[1]Figlewski, S. “Market ‘Efficiency’ in a Market with Heterogeneous Information.” Journal of Political Economy, Vol. 86 (08 1978), pp. 581597.
[2]Figlewski, S “Capital Asset Pricing under Heterogeneous Expectations and the Importance of Restrictions on Short Sales.” Manuscript (1980).
[3]Figlewski, SInformation Diversity and Market Behavior.” Journal of Finance, forthcoming (1982).
[4]Grossman, S.Further Results on the Informational Efficiency of Competitive Stock Markets.” Journal of Economic Theory, Vol. 18 (1978), pp. 81101.
[5]Grossman, S., and Stiglitz, J.. “On the Impossibility of Informationally Efficient Markets.” American Economic Review, Vol. 70 (06 1980), pp. 393408.
[6]Jarrow, Robert. “Heterogeneous Expectations, Restrictions on Short Sales, and Equilibrium Asset Prices.” Journal of Finance, Vol. 35 (12 1980), pp. 11051113.
[7]Lintner, J.The Aggregation of Investors' Diverse Judgments and Preferences in Purely Competitive Markets.” Journal of Financial and Quantitative Analysis, Vol. 6 (12 1969), pp. 347400.
[8]Miller, Edward. “Risk, Uncertainty, and Divergence of Opinion.” Journal of Finance, Vol. 32 (09 1977), pp. 11511168.
[9]Reinganum, Mark. “Misspecification of Capital Asset Pricing: Empirical Anomalies Based on Earnings Yields and Market Values.” Journal of Financial Economics, Vol. 9 (03 1981).
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Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
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