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The Effect of Short Selling and Margin Requirements in Perfect Capital Markets

Published online by Cambridge University Press:  19 October 2009

John Lintner
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Extract

It is well known that present institutional arrangements do not permit investors to use the proceeds of short sales to finance the purchase of other stocks. On the contrary, investors must place the proceeds of short sales in escrow, and they must also affirmatively invest (deposit) an additional amount equal to margin requirements (which may be as much as 100 percent) of the “proceeds” of the short sales. These escrowing and depositing requirements together will be referred to as “short-sales escrowing requirements.” These escrowing requirements not only involve forced or “by-product” holdings of the (nominally) riskless asset, they also change the structure of the investor's wealth constraint by requiring the substitution of absolute values for the natural number of shares when short sales are made.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 6 , Issue 5 , December 1971 , pp. 1173 - 1195
Copyright
Copyright © School of Business Administration, University of Washington 1971

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References

[1]Fama, Eugene F. “Multiperiod Consumption-Investment Decisions.” American Economic Review, March 1970, pp. 163–174.Google Scholar
[2]Lintner, John. “The Aggregation of Investor's Diverse Judgments and Preferences in Purely Competitive Security Markets.” Journal of Financial and Quantitative Analysis, December 1969, pp. 347–400.CrossRefGoogle Scholar
[3]Lintner, John. “Security Market Equilibrium with Increasing Costs of Debt, Restrictions on Total Debt, and Imperfect Markets for Short Sales.” Journal of Financial and Quantitative Analysis (forthcoming).Google Scholar
[4]Lintner, John. “Security Market Equilibrium, Taxes, The Price of Risk andSize of Market: A Generalization.” Harvard Institute of kconomic Research, Discussion Paper, 1971.Google Scholar