Portfolio Returns and the Random Walk Theory: Reply

Cheng, Pao Lun; Deets, M. King

doi:10.2307/2326407

The Journal of Finance

1976

DOI: 10.2307/2326407

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Portfolio Returns and the Random Walk Theory: Reply

Pao Lun Cheng¹,

M. King Deets²

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1976

1981

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“…Finally, to the extent that certain biases mentioned by Goldman may have intensified the negative serial correlations, Cheng and Deets [4] have pointed out that negative serial correlation may not be sufficient to account for the RB return superiority. In this regard, Blume and Friend [1, fn.…”

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Cheng¹,

Deets²

1976

The Journal of Finance

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Cheng¹,

Deets²

1976

The Journal of Finance

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Short Sales and Mechanical Trading Rules*

Nawrocki¹

1981

The Financial Review

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The purpose of this paper is to explore the viability of short sales in a mechanical trading rule before and after the implementation of government regulation of security markets, thereby providing a test of the effectiveness of government regulations.The government regulations were implemented through the Securities Act of 1933 and the Securities Exchange Act of 1934.' These acts sought to provide less volatile and more efficient security markets. In addition to the public disclosure of accounting information, these acts provided additional restrictions on short sales. It was felt at the time that short sales had been used in market manipulation schemes that were detrimental to the efficiency of the markets. At first, the uptick rule was implemented along with higher margin requirements.2 During a later period (1937)(1938)(1939)(1940)(1941)(1942)(1943)(1944)(1945), short sales were subjected to a higher margin requirement. The effect of these changes on short sales by the public was dramatic. In the 1920's, the majority of all short sales on the New York Stock Exchange were by non-members. By 1964, this proportion had declined to 23%. Currently, only 15% of all short sales are by nonmembers.This decline in use could result from two major scenarios. First, investors when faced with these restrictions could have instituted short positions through alternative methods such as the use of options. With the growth of the option markets during the 1970's, these alternative short positions have become easier to accomplish and may, in fact, explain the decrease in short sales by the public since 1964.A second scenario is that short positions are not as profitable with government regulations as they were in the unregulated market environment prior to 1935. A drop in the profitability of short positions after 1935 would indicate that government regulations improved the efficiency of the stock market. This second view is controversial since Benston [2] [3] has argued that government regulation has not had any favorable effect on security markets. This paper will present an empirical test of this second scenario by using a mechanical trading rule that employs short sales. Empirical evidence will be presented that shows that the profitability of a trading strategy utilizing short sales declines dramatically after 1935.

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Portfolio Returns and the Random Walk Theory: Reply

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Short Sales and Mechanical Trading Rules*

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