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Could Short Selling Improve the Quality of Emerging Stock Markets? – Review of Some Theoretical and Empirical Evidence Presented in Literature

Short selling is a common practice in many developed markets. However, due to the lack of a suitable regulatory, institutional and market infrastructure, short selling cannot be practiced in many emerging market countries. Furthermore, the regulators who were concerned about potential adverse effects of short selling during various episodes of crises decided to place some constraints on short selling at different points in time and for different periods of time. Based on the experience with the short selling practices and the bans on short selling in different countries around the world and by respecting the assumption that there is at least a basic regulatory, institutional and market infrastructure, the author will try to answer the question: Could short selling improve the quality of emerging stock markets? According to the author’s findings, short selling could improve the quality of emerging stock markets, under the determined condition. Additionally, as the regulatory, institutional and market infrastructure becomes more and more developed, the possibility of the market quality to be improved to a higher degree by short selling will increase.