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- Title
Price Convexity and Skewness.
- Authors
XU, JIANGUO
- Abstract
This paper develops a model in which investors who are prohibited from short selling agree to disagree on the precision of a publicly observed signal. The model implies that the equilibrium price is a convex function of the public signal. The model predicts that (1) the stock price reacts more to good news than to bad news; (2) the skewness of stock returns is positively correlated with contemporaneous returns, but negatively correlated with lagged returns; (3) short sale constraints increase rather than decrease skewness; and (4) disagreement about information precision increases skewness. Empirical tests conducted find supportive evidence for all these predictions.
- Subjects
STOCK prices; SHORT selling (Securities); MARGIN accounts; INVESTORS; CONVEX functions; ECONOMIC models
- Publication
Journal of Finance (Wiley-Blackwell), 2007, Vol 62, Issue 5, p2521
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.2007.01283.x