The Consequences of Short-Sale Constraints on the Stability of Financial Markets (1st ed. 2019)

Gevorg Hunanyan develops a model that provides a comprehensive theoretical framework to study the consequences of short-sale constraints on the stability of financial markets.

This model shows that overpricing of securities is solely attributable to the subjective second moment beliefs of investors.

Thus, short-sale constraints prevent a market decline only if investors have low dispersion of beliefs, which in the model is embodied in the covariance matrix.

Moreover, the author analyses the consequences of short-sale constraints on the investor’s portfolio selection, risk-taking behaviour as well as default probability.

The author develops criteria that allow to analyse the effectiveness of short-sale constraints in reducing portfolio risk as well as default risk.