SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
The estimated α and β coefficients measure the extent to which positive and negative returns
tend to reverse or continue in subsequent periods. In a world where stock prices follow a random
walk, the true coefficients would be equal to zero. Unlike an ordinary autoregression, this
specification permits the degree of momentum or reversals to differ for positive and negative
shocks. In either case, positive coefficients would indicate that returns exhibit short-term
momentum, while a negative coefficient would indicate short-term reversals. For example, if the
coefficients α1 and α2 were estimated to be -0.05 and -0.01, this would mean that a negative
return of one percent would, on average, be followed by a positive return of five basis points in
the next period, and a positive return of one basis point in the period after that. If the coefficients
β1 and β2 were estimated to be -0.04 and -0.02, this would indicate that a positive return of one
percent would on average be followed by negative returns of four and then two basis points in
the next two periods. We are interested in comparing these coefficients for pilot and control
stocks. If price restrictions help prevent short-term negative stock price manipulations, we would
expect to see the α coefficients higher for pilot stocks than for control stocks.
E. Small and Low-Volume Stocks
One policy alternative outlined in the first Pilot Order was to extend a uniform test to all
securities, including securities with a lower market capitalization or less actively traded than
those included in the Pilot. While our analysis cannot directly investigate the effects of price
restrictions for stocks beyond the range covered by the pilot sample, it can provide relevant
evidence by investigating whether the impact of the Pilot has been substantially different for the
smaller stocks than for the larger stocks in the Pilot, or whether the impact has differed for
Prepared by the Office of Economic Analysis 33
DRAFT