SHORT SELLING, UNWINDING, AND MISPRICING

This article highlights the impact of short selling restrictions and e arly unwinding opportunities on the relation between futures and spot prices. Within a multiperiod equilibrium model, the influence of optim al arbitrage trading on the mispricing is analyzed. Results concerning trade volume and level, mean reversion, and path dependence of the mi spricing are provided. The empirical evidence suggests that short sell ing restrictions and early unwinding opportunities are influential fac tors for the mispricing behavior. They help explain empirical findings reported in the literature, (C) 1998 John Wiley & Sons, Inc.