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Asian Review of Financial Research, Vol., No..
pp.447~467
pp.447~467
Short Selling by Individual Investors : Vice or Virtue?
Chan-Shik Jung Ph. D. Candidate in Finance, Korea University Business School
Woojin Kim Assistant Professor of Finance, Korea University Business School
Dong Wook Lee Associate Professor of Finance, Korea University Business School
This paper examines how individual investors¡¯ short sale transactions affect the stock market, using a unique regulatory change in Korea that allowed individual investors to sell short some¡ªbut not all¡ªdomestic stocks. We find no evidence that these transactions destabilize the market. Specifically, our differences-in-differences estimates indicate that stocks show little change in their return volatility or skewness after they become shortable. Rather, following the regulatory change, those stocks are traded within a narrower bid-ask spread and deviate less from the random-walk process, suggesting that they are priced more efficiently. Overall, our results cast doubt on the popular stereotyping of individual investors as noise traders. The results instead indicate that individual investors are capable of bringing in private information to the market.
Chan-Shik Jung
Woojin Kim
Dong Wook Lee
This paper examines how individual investors¡¯ short sale transactions affect the stock market, using a unique regulatory change in Korea that allowed individual investors to sell short some¡ªbut not all¡ªdomestic stocks. We find no evidence that these transactions destabilize the market. Specifically, our differences-in-differences estimates indicate that stocks show little change in their return volatility or skewness after they become shortable. Rather, following the regulatory change, those stocks are traded within a narrower bid-ask spread and deviate less from the random-walk process, suggesting that they are priced more efficiently. Overall, our results cast doubt on the popular stereotyping of individual investors as noise traders. The results instead indicate that individual investors are capable of bringing in private information to the market.
Short sale,Individual investors,Korean stock market,Destabilizing
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