Abstract
The paper discusses the renewed short selling regulation (Regulation (EU) No 236/2012) in the European Union. The focus is on the provisions that deal with prohibiting short selling in exceptional market circumstances. The Regulation further enforces certain obligations to report and disclose short positions. It is concluded that banning short selling is not an effective tool to contain extreme price volatility. The difference-in-differences regression and repeated measures GLM were used to test whether short selling bans were successful in containing volatility of those Spanish and Italian stocks that were subject to two back-to-back prohibitions during the years 2011-2013. The results are consistent with the majority of previous research, suggesting that the effectiveness of short sale constraints in reducing volatility is limited at best. Furthermore, there are evidence of counterproductive effects: constraints on short selling may actually increase volatility as well as deteriorate liquidity. However, based on theory and previous studies, reporting and disclosure requirements shall be favored provided they improve market efficiency as well as supervisory work of regulatory bodies.This paper discusses the renewed short selling regulation (Regulation (EU) No 236/2012) in the European Union. The focus is on the provisions that deal with prohibiting short selling in exceptional market circumstances. The Regulation further enforces certain obligations to report and disclose short positions. It is concluded that banning short selling is not an effective tool to contain extreme price volatility. The difference-in-differences regression and repeated measures GLM were used to test whether short selling bans were successful in containing volatility of those Spanish and Italian stocks that were subject to two back-to-back prohibitions during the years 2011-2013. The results are consistent with the majority of previous research, suggesting that the effectiveness of short sale constraints in reducing volatility is limited at best. Furthermore, there are evidence of counterproductive effects: constraints on short selling may actually increase volatility as well as deteriorate liquidity. However, based on theory and previous studies, reporting and disclosure requirements shall be favored provided they improve market efficiency as well as supervisory work of regulatory bodies. <w:LsdException Locked="fal
Highlights
The financial crisis in 2008 initiated a global recession which eventually, but only partly contributed to the sovereign debt crisis in the Eurozone
The short selling bans of 2011-13 did not contain the price volatility of Spanish and Italian financial stocks that were subjected to trading constraints
The target that market authorities had set for the interventions was not accomplished
Summary
The financial crisis in 2008 initiated a global recession which eventually, but only partly contributed to the sovereign debt crisis in the Eurozone. The most essential reforms include the implementation of Basel 3 framework into the EU banking regulation (CRD IV) as well as in further accordance with global collaboration the European Market Infrastructure Regulation (EU) No 648/2012 and Alternative Investment Fund Managers Directive (2011/61/EU), which provide comprehensive rules for overthe-counter derivatives trading and for the business activity conducted by property, private equity, commodity and hedge funds It is noteworthy though, that this type of reactive regulatory work should not be viewed as anything unique. This provides a research design where the same treatment (=short selling ban) is repeated twice on same patients (=financial stocks), allowing any repetitive intervention effect to be observed with higher degree of certainty The success of these constraints is concluded by reflecting the empirical results against the arguments that were used to advocate the said measures. A conclusion of the necessity of such powers granted for market authorities is drawn
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