A test of market efficiency when short selling Is prohibited: A case of the Dhaka Stock Exchange

A ban on short selling exists on several exchanges, especially in emerging markets. In most cases, short selling has always been prohibited, thus making it difficult to examine the ban’s effect on price discovery. In this paper, we consider data from the Dhaka Stock Exchange (DSE) to test for a short selling ban on market efficiency. The analysis examines runs in daily stock returns and then forms a distribution of return clusters according to their duration. Using Monte Carlo simulation, we find that runs of longer duration appear more frequently in the DSE data than we would expect in efficient markets. We compare these results to stocks in the Dow Jones Industrial Average (DJIA). We find that the same runs tests accord with market efficiency for liquid and easily shorted DJIA stocks.

Title	A test of market efficiency when short selling Is prohibited: A case of the Dhaka Stock Exchange
Creator	Swidler, Steve
Creator	Sochi, M.
Publisher	Journal of Risk and Financial Management
Academic Department	Economics
Division	Social Sciences
Organization	Lafayette College
Date Issued	October 18, 2018
Date Available	2018-11-15T15:00:53Z
Type	Article
Language	English
Keyword	market efficiency
	Monte Carlo simulation
	non-parametric tests of efficiency
	emerging market exchange
Bibliographic Citation	Sochi, M. and S. Swidler (2018) "A test of market efficiency when short selling Is prohibited: A case of the Dhaka Stock Exchange." Journal of Risk and Financial Management 11 (4): 59.
Standard Identifier	Handle 10385/2456
Permalink	http://hdl.handle.net/10385/2456
Rights Statement	Creative Commons - Attribution