Financial Markets With Short Sales Prohibition

Abstract

It is widely thought that short selling practices are a check against speculation and provide hedging mechanisms for many financial investments. Yet, due to its controversial character during economic downturns, regulators have banned short selling in many occasions. In addition, short sales prohibitions are inherent to the majority of emerging markets, commodity markets and the housing market. In this dissertation, we analyze the consequences of short sales prohibition in general semi-martingale financial models. We first prove the Fundamental Theorem of Asset Pricing in continuous time financial models with short sales prohibition and where prices are driven by locally bounded semimartingales. We then study the theoretical behavior of futures prices in these models. Finally, under our framework, we extend some of the classical results on the hedging problem to general semi-martingale financial models and present a financial connection to the concept of maximal claims.