The Economic Effects of Short Sales in Texas - Thesis Example

Download file to see previous pages In the stock market, the short sale involves the sale of borrowed stock which is also a security. Short sales in the housing market have until recently, specifically in 2009 been a rare occurrence and are therefore very sparsely covered in the literature. Short sales in the stock market, however, have been in use for a very long time and as such have been the subject of much scholarly debate and research. Using Fuller’s theory of short selling this research study analyses findings in the literature on short sales and determines that over the last five years, short sales in the housing market and the stock market have been driven by fear and greed for the most part. However, neither short sales in the housing market nor the stock market can be said to have hurt the economy in the US. Instead, it is more likely that they have both contributed to economic recovery efforts.

Economists believe that short sales exacerbate asset price declines (Pulido, 54). Consequently, short-sale constraints are typically implemented as a means to control price instability when the economy becomes depressed. For example, in August 2011, the European Securities and Markets Authority constrained short sales in key European countries as a means of stopping volatility in the European market emanating from a debt crisis in Europe. Likewise, in the US when the housing bubble burst in 2008, the U.S. Securities and Exchange Commission implemented a ban on short sales by nearly 800 financial services firms to stabilize those firms. In the meantime, the UK’s Financial Services Authority introduced a short sale ban in respect of 32 financial services firms (Pulido, 54).

Short sales occur when an investor, acts in anticipation of a drop in stock prices, and “sells borrowed stock” expecting to profit through a purchase of the stock at a future date for a reduced price ( 800). These short sales are regarded as harmful to the firms that indulge them and the market as a whole. On the one hand, short sales can influence the “manipulation of stock prices” (801). For example, one party can sell stocks short and in doing so may “spread false rumors about the company,” and then proceed to purchase the stock once the prices drop (801). In the meantime, the company’s reputation is harmed, quite often irreparably. ...Download file to see next pages Read More