We propose a novel “bias-corrected realized variance” (BCRV) estimator based upon the appropriate re-weighting of two realized variances calculated at different sampling frequencies. Our bias-correction methodology is found to be extremely accurate, with the finite sample variance being significantly minimized. In our Monte Carlo experiments and a finite sample MSE comparison of alternative estimators, the performance of our straightforward BCRV estimator is shown to be comparable to other widely-used integrated variance estimators. Given its simplicity, our BCRV estimator is likely to appeal to researchers and practitioners alike for the estimation of integrated variance.

The six short-sales constraints (SSCs) regime changes from 2002 to 2009 in the Taiwan stock market provide “natural social” experiments to examine how different SSC intensities affect price adjustment efficiency and market stability. There are three main findings. Firstly, we derive the theoretical price with put–call parity from seven series index options. Using a “threshold error correction model” (TECM), we find a more efficient price adjustment to new equilibria for upward adjustments than for downward adjustments. The SSCs impede the price adjustment downward, especially during the financial crisis of 2008. Therefore, relaxing the short-sales constraints essentially improves price efficiency. Secondly, our findings also refute the claim that tighter SSCs can help stabilize the market since the tightening of the short-sales restriction leads to increases in both market volatility and downside risk even after controlling the investor fear gauge of the Taiwan volatility index (TVIX). These results hold even when market conditions and liquidity are controlled. Finally, the evidence from our counterfactual policy analysis suggests that tighter constraints help restore market confidence even though prices may fall more sharply without short-sales bans. As a result, policymakers may practically optimize to strike a balance between the benefits of restored emerging market order and the cost of elevated market volatility.

We examine how short-sales policy regimes affect the efficiency of price adjustments and market stability. Using a ‘threshold error correction model’ (TECM), we find a more rapid convergence rate to new equilibria for upward adjustments than for downward adjustments. Moreover, relaxing the short sales constraints essentially improves price efficiency. Our findings refute the claim that tighter constraints can help stabilize the market since the tightening of the short-sales restriction leads to increases in both market volatility and downside risk. These results hold even when market conditions and liquidity are controlled. Even though prices may fall more sharply without short-sales bans, rather interestingly, the evidence from our counterfactual policy analysis suggests that tighter constraints help restore market confidence. As a result, policymakers may practically optimize to strike a balance between the benefits of restored market order and the cost of elevated market volatility.