This Is AuburnElectronic Theses and Dissertations

A Test of Market Efficiency When Short Selling is Prohibited: A Case of the Dhaka Stock Exchange




Sochi, Maria

Type of Degree

Master's Thesis




This study investigates the impact of an absence of short-selling practice on stock price efficiency in the Dhaka Stock Exchange (DSE). I estimate the sign and magnitude of runs ranging from one-day to twenty-day-long runs in daily returns of the benchmark index and twenty one most liquid stocks over the sample period. I also present a similar analysis for the Dow-Jones Industrial Average Index and thirty Dow-Jones stocks for a comparative purpose. In each case of DSE and Dow-Jones, I establish the statistical significance of the results from a Monte-Carlo Simulation which illustrates the random walk price behavior of stocks. I find that unlike Dow-Jones, the number of five-day and longer runs for negative returns in DSE is statistically significant and abnormally higher than their positive counterpart. The conclusion supports prior evidence that in a market where short-selling is not allowed, prices adjust slowly for negative information because the absence of short selling suppresses the action of pessimists and not the optimists.