TY - JOUR
T1 - The effect of short selling and borrowing on market prices and traders’ behavior
AU - Duchêne, Sébastien
AU - Guerci, Eric
AU - Hanaki, Nobuyuki
AU - Noussair, Charles N.
N1 - Funding Information:
We thank Dimitri Dubois for his support in conducting the experiments reported in this paper at Montpellier, France. Comments and suggestions from Stefan Palan and Marc Willinger are gratefully acknowledged. We would like to thank conference participants at the workshop on the Economic Science with Heterogeneous Interacting Agents 2016 in Castellón de la Plana, ASFEE 2016 in Cergy-Pontoise, Experimental Finance 2017 in Nice, Behavioral and Experimental Analyses on Macro-finance workshops 2016, 2017 and 2018 in Nice, Tokyo, Kyoto and Amsterdam, and AFFI 2018 in Paris, as well as seminar participants at the Universities of Montpellier, Nice and at Montpellier Business School, for useful comments and suggestions. This project benefitted from financial support from French government managed by l’Agence Nationale de la Recherche under an ORA-Plus research project “ BEAM ” ( ANR-15-ORAR-0004 ) and Investissements d’Avenir UCA JEDI (ANR-15-IDEX-01). In particular, we thank the UCAinACTION project.
Publisher Copyright:
© 2019 Elsevier B.V.
PY - 2019/10
Y1 - 2019/10
N2 - This paper studies the effect of allowing borrowing and short selling on market prices and traders’ forecasts in an experimental asset market. There are four treatments, organized in a 2 × 2 design based on whether or not margin buying is allowed, and whether short selling is permitted or not. We observe that borrowing and short selling do not have significant effects on prices and forecasts due to extensive within-treatment heterogeneity. Beliefs are based on past prices of the current and previous markets, regardless of borrowing or short selling possibilities. Traders who have greater cognitive abilities tend to make more use of short selling and borrowing. A number of relationships regarding traders’ types, cognitive sophistication, and earnings observed in earlier experimental studies in which borrowing and short selling are not possible, generalize to markets with borrowing and short sales.
AB - This paper studies the effect of allowing borrowing and short selling on market prices and traders’ forecasts in an experimental asset market. There are four treatments, organized in a 2 × 2 design based on whether or not margin buying is allowed, and whether short selling is permitted or not. We observe that borrowing and short selling do not have significant effects on prices and forecasts due to extensive within-treatment heterogeneity. Beliefs are based on past prices of the current and previous markets, regardless of borrowing or short selling possibilities. Traders who have greater cognitive abilities tend to make more use of short selling and borrowing. A number of relationships regarding traders’ types, cognitive sophistication, and earnings observed in earlier experimental studies in which borrowing and short selling are not possible, generalize to markets with borrowing and short sales.
KW - Bubble
KW - Experimental asset market
KW - Margin buying
KW - Short sales
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U2 - 10.1016/j.jedc.2019.103734
DO - 10.1016/j.jedc.2019.103734
M3 - Article
AN - SCOPUS:85071613480
VL - 107
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
SN - 0165-1889
M1 - 103734
ER -