TY - JOUR
T1 - Dynamic asset pricing with interactions between short-sale and borrowing constraints
AU - Shi, Lei
AU - Xiao, Yajun
N1 - Copyright The Author(s) 2021. Published by Oxford University Press on behalf of The Society for Financial Studies. Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.
PY - 2021/12
Y1 - 2021/12
N2 - This paper studies the joint effect of borrowing and short-sale constraints under heterogeneous beliefs and risk aversions. Although the constraints never simultaneously bind in equilibrium, interesting economics emerge in the anticipatory effects of potentially future binding constraints. In particular, the risk-free rate and Sharpe ratio experience endogenous jumps at a critical state, where two equilibria coexist. Moreover, a short-sale ban can lead to a lower stock price and higher volatility depending on the relative tightness between the constraints, and tightening the borrowing constraint during a short-sale ban can also make returns more volatile.
AB - This paper studies the joint effect of borrowing and short-sale constraints under heterogeneous beliefs and risk aversions. Although the constraints never simultaneously bind in equilibrium, interesting economics emerge in the anticipatory effects of potentially future binding constraints. In particular, the risk-free rate and Sharpe ratio experience endogenous jumps at a critical state, where two equilibria coexist. Moreover, a short-sale ban can lead to a lower stock price and higher volatility depending on the relative tightness between the constraints, and tightening the borrowing constraint during a short-sale ban can also make returns more volatile.
UR - http://www.scopus.com/inward/record.url?scp=85115210083&partnerID=8YFLogxK
U2 - 10.1093/rapstu/raab003
DO - 10.1093/rapstu/raab003
M3 - Article
SN - 2045-9920
VL - 11
SP - 886
EP - 923
JO - Review of Asset Pricing Studies
JF - Review of Asset Pricing Studies
IS - 4
ER -