Short Selling with Model Uncertainties and Heterogeneous Beliefs

We propose a model of asset prices, volume and volatility based on differences of opinions and model uncertainty level among investors. We conclude that asset price will be falling after the short-sales constraints are repealed given other things equal, two important factors-limited participation rate and the dispersion of investor 's expectations are studied, we show that short-selling improve the market quality by increased participation rate and trading volume which actually would be bene ficial to the price discovery process. However, the downside is the possible excess volatility of the price when the uncertainty level distribution positively correlated with the dispersion of investor' s expectations