Shorting’s Costly Complexities

The important economic role played by short-sellers has received increasing academic attention in recent years. The research has demonstrated that short-sellers, as a group, are key market intermediaries that improve the informational efficiency of prices, increase market liquidity and, by doing so, help lower overall country-level costs of capital.

In addition, temporary short-selling bans have been discovered to impede pricing efficiency. Without short-sellers, equity prices can become overvalued because only the optimists would be expressing their opinions on valuations.

The research has also found that, even in the presence of short-sellers, anomalies (mispricings) continue to exist because stocks can remain overvalued. Academic research has tried to explain why these anomalies continue to persist.

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