A Study on the Effectiveness of Short-Selling Regulation in View of Regulation Period Using Artificial Markets

Abstract

Since the subprime mortgage crisis in the United Sates, stock markets around the world have crashed, revealing their instability. To stem the decline in stock prices, short-selling regulations have been implemented in many markets. However, their effectiveness remains unclear. In this paper, we discussed the effectiveness of short-selling regulation which was invoked temporarily after the market satisfies a regulation condition using an artificial market. First, we proposed an artificial market in which short-selling was regulated after the market satisfied the regulation condition. Next, we observed price variations in the markets in which the durations of short-selling regulation were different and discussed the bubble mechanism of them. Then, we observed the correlation between market stability and regulation periods and it was found that the longer the regulation period was, the more instable markets were. Therefore, we have found short-selling regulation had the property that it not only stemed the decline in the prices but also increased the prices excessively and market instability increased with increasing regulation period. Finally, we determined performances of each agent type in the market in which the regulation was invoked.