The effect of short selling and borrowing on market prices and traders’ behavior

Sébastien Duchêne (1) , Eric Guerci (2) , Nobuyuki Hanaki (3) , Charles N. Noussair (4)

1 CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010
2 GREDEG - Groupe de Recherche en Droit, Economie et Gestion
3 Osaka University [Osaka]
4 University of Arizona

This paper studies the influence of allowing borrowing and short selling on market prices and traders’ forecasts in an experimental asset market. We verify, although not statistically significantly so, that borrowing tends to increase asset overvaluation and price orecasts, while short selling tends to reduce these measures. We also show that a number of results on beliefs, traders’ types, cognitive sophistication, and earnings obtained in earlier experimental studies in which borrowing and short selling are not possible, generalize to markets with borrowing and short sales.

Mots clés: experimental asset market; bubble; margin buying; short sales

Domaines: Economies et finances

Sébastien Duchêne, Eric Guerci, Nobuyuki Hanaki, Charles N. Noussair. The effect of short selling and borrowing on market prices and traders’ behavior. Journal of Economic Dynamics and Control, 2019, 107, pp.103734. ⟨10.1016/j.jedc.2019.103734⟩. ⟨hal-02278885⟩