Is the Overheated Short-selling Stock Designation Regulation Properly Designed? Based on the Clustering Analysis of Overheated Short-selling Stocks

Abstract

This paper examines whether the overheated short-selling stock designation regulation is effectively designed. The regulation prohibits short sales of overheated short-selling stocks for one day to call investors’ attention and prevent stock price declines. Comparing overheated short-selling stocks with control group, we find no statistically significant difference in their stock prices after the prohibition. This finding indicates that the one-day short sale ban is not effective in preventing stock price declines. We further show that the difference in short sale rates between overheated short-selling stocks and control group varies by types of overheated short-selling stocks. This result means that the regulation can stabilize short trading in certain types of stocks while it can also decrease market stabilization in other types. Lastly, we present the cluster of overheated short-selling stocks that is effective in preventing stock price declines through clustering analysis. It indicates that the effectiveness of the regulation is selective when a stock exhibits certain patterns, suggesting that the regulation should be designed more carefully.