Dynamic asset pricing with interactions between short-sale and borrowing constraints

Lei Shi, Yajun Xiao

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)
69 Downloads (Pure)

Abstract

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.

Original languageEnglish
Pages (from-to)886–923
Number of pages38
JournalReview of Asset Pricing Studies
Volume11
Issue number4
Early online date10 Feb 2021
DOIs
Publication statusPublished - Dec 2021

Bibliographical note

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.

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