Measuring the association between short selling and price efficiency: A new stock-level analysis

Abstract

This study examines the relationship between short selling and price efficiency using a novel approach. We introduce new association indices based on multiple dimensions of price efficiency, enabling both market-wide and stock-level analysis while complementing existing methods. We define good short selling as improving price efficiency, and bad short selling as diminishing it. Applying this method to the Korean stock market demonstrates that this new perspective can offer fresh insights into the relationship between short sales and price efficiency. The proposed method yields market-wide results that diverge from conventional methods under some efficiency criteria, while aligning with them under others. It also quantifies the proportion of good and bad short selling at the individual stock level, supporting the broader market-level findings.