Short-selling Bans Research Articles

Does Short Selling Regulate Insider Trading?

This study investigates the impact of short selling on the relationship between the insider net buying ratio and excess returns, as well as on insider selling volume. The research period is divided into three distinct phases: short selling allowed, short selling banned, and partial short selling. The two primary findings of the analysis are as follows. First, the profitability of insider trading, assessed through the relationship between the insider net buying ratio and excess returns, is impacted positively when short selling is banned and negatively when it is permitted. Second, the insider selling volume significantly increases following short selling bans and decreases when the same is allowed. These results suggest that short sellers function as a market discipline mechanism, regulating both the profitability and volume of insider trading. This indicates that short selling regulations wield a substantial influence on the behavior and profitability of insider trading.

The 2008 short-selling ban’s impact on tail risk

We examine how the 2008 U.S. short-selling ban on the stocks of financial institutions impacted their equity tail risk. Using propensity score matching and difference-in-difference regressions, we show that the ban was not effective in restoring financial stability as measured by the stocks’ dynamic Marginal Expected Shortfall. In contrast, especially large institutions, those who were most vulnerable to market downturns in the preban period, as well as those equities with associated put option contracts, experienced sharp increases in their exposure to market downturns during the ban period, contrary to regulators’ intentions.

Short selling bans and price responses in a multimarket setting

Short selling bans and price responses in a multimarket setting

The price effect of temporary short-selling bans: Theory and evidence

We develop a model of temporary short-selling bans by extending the infinite-horizon model of Scheinkman and Xiong (2003). Our model predicts that a temporary short-selling ban leads to a speculative bubble that is the highest at the beginning of the ban and gradually converges to zero. Examining the 2008 short-selling ban in the U.S., we find evidence consistent with the model’s predictions. The innovation of our empirical design is to use the financial segments of non-banned stocks as a control group for the banned financial stocks. Our results are robust across different test specifications and different samples of stocks.

Margin-buying, short-selling, and stock valuation: Why is the effect reversed over time in China?

China launched a pilot program in March 2010 to lift the ban on margin-buying and short-selling. Based on the first two batches of designated stocks, the literature documents that lifting the ban has a negative effect on stock valuation. However, we show that the effect has reversed to positive for the next six batches of designated stocks. We explore several potential explanations. Our analyses show that as short-selling volume grew at a much slower pace or even declined relative to margin-buying volume over our sample period, the positive effect of margin-buying on stock valuation has dominated the negative effect of short-selling. Both time-series and cross-sectional tests show that the imbalance between margin-buying and short-selling is the main driver of the reversal. We further show that the effect of lifting margin-buying and short-selling ban on stock price efficiency and discovery also reversed over time.

Market Impacts of the 2020 Short Selling Bans

Market Impacts of the 2020 Short Selling Bans

Short Selling, COVID-19 and the Regulators – Lessons Learned

Abstract 385Some national competent authorities (NCAs), as well as ESMA, have responded with short-selling bans and other restrictions to the COVID-19 pandemic. This approach has attracted criticism in both legal and economic literature. Although the COVID-19 pandemic has been overcome, or at least ways of dealing with COVID-19 have been found, it is of crucial importance for future EU short selling regulation how the legal basis of the measures for exceptional situations is designed and how the supervisory authorities will deal with it. This is valid not least because we are living in a time in which one crisis (COVID-19) follows the next (Ukraine war, gas shortage, inflation etc). Against this backdrop, this paper reviews the academic assessment of the supervisory approach taken and aims to contribute to an improved legislative and supervisory approach regarding short selling in (future) crises.386

Short-selling restrictions and financial stability in Europe: Evidence from the Covid-19 crisis

In March 2020, six European countries imposed temporary short-selling bans to prevent further stock price declines, to reduce volatility, and to ensure financial stability during the Covid-19 pandemic, whereas other countries abstained from implementing these restrictions. We examine the effects of these regulatory interventions on stock returns and market quality for major European countries with and without bans. Our results reveal that restricting short selling did not stabilize stock prices but adversely affected market liquidity, as reflected in wider bid-ask spreads and lower turnover. In addition, smaller stock markets and smaller firms suffered more from the deterioration in market quality. Using logit regressions, we investigate the determinants for the probability that a country would impose short-selling restrictions. The results suggest that countries with weaker economies, lower fiscal capacity, less financial development, and stricter lockdown measures were more likely to adopt a ban. Overall, short-selling bans during the Covid-19 crisis negatively affected market quality and consequently regulators in general should abstain from implementing such restrictions in the future.

Market Quality and Short-Selling Ban during the COVID-19 Pandemic: A High-Frequency Data Approach

The recent emergence of COVID-19 and the subsequent short-selling restriction (SSR) imposed on some equity markets provide us with a unique framework to analyze the effects of this kind of measure on market quality in the context of increasingly automated equity markets. We contribute to the literature by analyzing the microstructure and quality parameters of the Spanish equity market during COVID-19 and SSR. We study four subperiods, namely pre-crisis, turmoil, SSR, and first de-escalation periods, by means of a tick-by-tick dataset and the complete limit order book (LOB). We observe the following impact of the SSR on the constituents of IBEX 35: (1) the SSR did comply partially with its aim at an intraday level regarding volatility, but liquidity was reduced; (2) liquidity deterioration affected more the sell than the buy side of the LOB; (3) high-frequency activity (HFT) diminished during SSR, reinforcing volatility; (4) negative effects on liquidity and HFT diminished and disappeared as the ban was lifted; (5) HFT unidirectionally Granger causes 1 min realized volatility while the natural logarithm of the slope of the LOB bidirectionally Granger causes 1 min realized volatility.

Back to the futures: When short selling is banned

We examine the effect of single-stock futures (SSFs) trading on the price discovery and market quality of underlying stocks during the 2008 short-selling ban in the United States. We find a significant increase in SSFs trading volume for banned stocks during the ban period. We show that the contribution of SSFs trading to underlying stock price discovery also increased significantly. Moreover, SSFs trading helped mitigate the negative effect of the short-selling ban on market quality. Although SSFs trading in the U.S. still lags other countries, our findings project an increasingly important role for them in the U.S. financial market.

AN EMPIRICAL ANALYSIS OF OPTION PRICING WITH SHORT SELL BANS

Short sell bans are often imposed during a financial crisis as a desperate measure to stabilize financial markets. Yet, the impact of short sell bans on option pricing and hedging is not well studied, at least quantitatively, until very recently when Guo & Zhu [(2017) Equal risk pricing under convex trading constraints, Journal of Economic Dynamics and Control 76, 136–151] and He & Zhu [(2020) A revised option pricing formula with the underlying being banned from short selling, Quantitative Finance 20 (6), 935–948] formulated a new pricing framework with the underlying being either completely or partially banned from short selling. However, no empirical results were provided to substantiate the usefulness of the formulae, as well as to deepen our understanding on the effects of short sell bans. This paper provides a comprehensive empirical study on the effects of short sell bans to the standard option pricing theory by carrying out both cross-sectional and options time series model calibration of the model devised by He & Zhu (2020) [A revised option pricing formula with the underlying being banned from short selling, Quantitative Finance 20 (6), 935–948]. Overall, our empirical results indicate that the alternative option pricing formula considering short sell restrictions has the ability to capture highly-quoted implied volatility, with an evident improvement of 39% out-of-sample performance compared to the benchmark Black–Scholes model during the period of short sell ban.

The Price Effect of Temporary Short-Selling Bans: Theory and Evidence

The Price Effect of Temporary Short-Selling Bans: Theory and Evidence

Short Selling and Information Quality: Evidence from Natural Experiments in an Emerging Market

ABSTRACT Using a comprehensive sample of Chinese-listed firms and the generalized difference-in-differences (DID) approach, we find that information quality significantly improves after an exogenous removal of short selling ban. Treated firms engage less in accruals management and experience fewer restatements. Auditors exert more effort and spend more time in auditing financial statements. We further demonstrate that the improvement of information quality is driven by increased investor attention and media coverage of the treated firms. The results are more pronounced in firms with lower institutional ownership and in non-state-owned firms.

BİST Pay Piyasasında Açığa Satış Yasağı ve COVID-19 Düzenlemelerinin Piyasa Etkinliği Üzerindeki Etkisi

Bu çalışmada ilk olarak 28 Şubat 2020 tarihinde Sermaye Piyasası Kurulunun (SPK) Borsa İstanbul (BİST) pay piyasalarında açığa satışı yasakladığını duyurmasının BİST-30 endeksi şirketleri üzerindeki etkisi incelenmiştir. İkinci olarak ise COVID-19 salgınının ve bunu izleyen BİST piyasa düzenlemelerinin BİST-30 endeksi şirketleri üzerindeki etkisi incelenmiştir. 11 Mart 2020 tarihinde Türkiye'de ilk COVID-19 vakası raporlanmış ve aynı gün Dünya Sağlık Örgütü (DSÖ) virüs salgınını pandemi olarak ilan etmiştir. Piyasalarda oluşan tedirginlik nedeniyle Borsa İstanbul Genel Müdürlüğü 12 Mart günü pay piyasasında devre kesici tetikleme oranı ile günlük fiyat değişim limitlerinde değişikliğe gideceğini duyurmuş ve 13 Mart günü yeni oranları uygulamaya koymuştur. Olay etüdü yöntemi kullanılarak, 28 Şubat ve 13 Mart günleri 2 ayrı olay günü olarak belirlenerek her iki olayın da BİST-30 endeksi şirketleri üzerindeki etkisi incelenmiştir. İlk olay incelendiğinde açığa satış yasağı sonrasında endeks ve pay senetlerinin değer kaybettiği görülmüştür. İkinci olarak fiyat marjı ve devre kesici tetikleme oranı düzenlemeleri sonrasında anormal getirinin pozitif olduğu bulunmuştur. Dolayısıyla bu uygulamanın piyasada fiyat dalgalanmaları ve fiyat oluşumu etkinliği açısından faydalı olduğu sonucuna varılmıştır.

Early COVID-19 policy response on healthcare equity prices

PurposeThis paper aims to investigate the implementation of the short selling ban policy imposed by the Italian stock exchange on health-care stock prices, as a tool to mitigate COVID-19 price effects. Important contributions are in terms of assessing the effect of the temporary short selling ban on restricted health-care stocks; the effect of COVID-19 cases and crude oil price volatility onto health-care stocks; and whether COVID-19 resulted in a change in the risk and average stock price of health-care stocks.Design/methodology/approachThe methodology involves impulse responses to capture the shock of the short selling ban onto health-care stocks, and Markov switching regimes to capture the effect of COVID-19 onto the risk and prices in the health-care industry. Daily data from 9 November 2018 till 23 December 2020 is used.FindingsFindings suggest there were significant changes in average prices in health-care technology and health-care services stocks before, during and after the short selling ban. Shocks to the number of COVID-19 cases and crude oil price volatility impacted health-care stocks but lasted only for a few days. While daily changes in the number of COVID-19 cases impacted some health-care stocks in the presence of a two-state Markov regime, insignificant coefficients and relatively low duration suggest that the short selling policy did not significantly change the average price and risk in health-care stocks to explain a two-state regime in the health-care industry.Research limitations/implicationsInsignificant coefficients in a two-state Markov regime reinforce that short-selling policies have a short-lasting effect onto health-care equity prices. The findings are limited by the duration of the short selling policy, the pandemic event and the health-care industry.Originality/valueThis is the first study to look at the impact of early COVID-19 and short selling ban policy on health-care stocks.

Short-Selling and Financial Performance of SMEs in China: The Mediating Role of CSR Performance

The aim of this study is to examine the effect of short-selling deregulation on the financial performance of SMEs in China. The external governance role of short-selling is also tested by adopting corporate social responsibility (CSR) performance as the mediating effect. This study investigates a panel data analysis with a sample of 5038 firm-years of SMEs listed in Shenzhen Stock Exchange from 2010 to 2019. The PSM-DID method is adopted in this study to alleviate self-selection and endogenous problems to observe the comparable pure effect of short-selling deregulation, while the mediation test is conducted based on Baron and Kenny’s model. The finding of this study showed that the existence of short-selling could enhance firm financial performance and the mediating effect of CSR performance position in their relationship. In addition, the further analysis revealed that the mediating effect of CSR is more pronounced for family businesses and firms with high real short-selling threats. The robust test of alternative measurements is conducted and valid. This study provides insights for policymakers to consider further short-selling ban lifting and corporate executives to practice more CSR activities to improve the financial performance. Limitations and further implications of this study are also discussed.

Early COVID-19 Policy Response on Healthcare Equity Prices

Purpose: This study investigates the implementation of the short selling ban policy imposed by the Italian stock exchange on healthcare stock prices, as a tool to mitigate COVID-19 price effects. Important contributions are in terms of assessing (i) the effect of the temporary short selling ban on restricted healthcare stocks, (ii) the effect of COVID-19 cases and crude oil price volatility onto healthcare stocks, and (iii) whether COVID-19 resulted in a change in the risk and average stock price of healthcare stocks.Design/methodology/approach: The methodology involves impulse responses to capture the shock of the short selling ban onto healthcare stocks, and Markov switching regimes to capture the effect of COVID-19 onto the risk and prices in the healthcare industry. Daily data from 9th November 2018 till 23rd December 2020 is used.Findings: Findings suggest there were significant changes in average prices in healthcare technology and healthcare services stocks before, during and after the short selling ban. Shocks to the number of COVID-19 cases and crude oil price volatility impacted healthcare stocks but lasted only for a few days. While daily changes in the number of COVID-19 cases impacted some healthcare stocks in the presence of a two-state Markov regime, insignificant coefficients and relatively low duration suggest that the short selling policy did not significantly change the average price and risk in healthcare stocks to explain a two-state regime in the healthcare industry.Research limitations/implications: Insignificant coefficients in a two-state Markov regime reinforce that short-selling policies have a short-lasting effect onto healthcare equity prices. The findings are limited by the duration of the short selling policy, the pandemic event and the healthcare industry. Originality/value (mandatory): This is the first study to look at the impact of early COVID-19 and short selling ban policy on healthcare stocks.

Asset Allocation and Risk Management in a Fractured World Economy

This paper co-authored by M. Nicolas J. Firzli and David Weeks looks at the notions of long-term asset allocation and the ‘quest for yields’ from the perspective of AUS, European and North American pension investors and board members (trustees), which where discussed at two recent global conferences organised by Singapore Economic Forum (SEF) and the G7 Pensions Summit (G7 P7).Unorthodox central banking policies and their excesses are discussed by the co-authors and other experts, including Baroness Ross Altmann, Member of the House of Lords and Suzanne Bishopric, Adv. Board Member, Singapore Economic Forum (SEF), fmr. CIO, UN Joint Staff Pension Fund (JSPF).The need for asset owners and asset managers alike to adjust to a "fractured world economy" in the "post Brexit era" is gauged with other experts, incl. Torbjörn Hamnmark, Head of Strategic Asset Allocation, Sweden's Tredje AP-Fonden (AP3) and the Rt Hon. Nick Sherry, founder & fmr. minister, AUS Ministry Superannuation & Corp. Law. The underlying geo-economic dynamics are analysed in light of “the ESG revolution" and the increasingly "datafied and non-linear" aspects of the world economy, which may eventually challenge (some of the more) traditional approaches to financial economics. The authors also look at the recent developments in quantitative investment research, deep data analysis, and the "ESG and sustainable finance" space – notably in light of the recent short-selling bans in some jurisdictions (Italy, Spain, France, South Korea etc), in relation to the lingering "Covid Crisis".They incorporate the remarks made by Bridget Realmuto LaPerla, State Street in that regard:“the lenders’ voice is part of their stewardship efforts: [truly] long-term investors think multigenerationally, which aligns well with key ESG characteristics. These shifting dynamics between the security lenders and the borrowers are key" [to understanding the future of finance]Dr Domenico Mignacca, Executive Director, Qatar Investment Authority (QIA), shares the preliminary findings of his ongoing research work on “single stock vs equally weighted (EW) and EW leveraged portfolios”, building in part on earlier research conducted with Fabozzi et al. Finally, the Hon. Nick Sherry argues that the ‘Australian Pension Miracle’ can be explained simply by three factors: “smart diversification across asset classes and geographies, higher-than-average exposure to private equity, venture capital and infrastructure investments, and the legal-political autonomy of pension board members (trustees).” The recently published Global Pension Assets study conducted by institutional investment consultants Willis Towers Watson seemed to echo the Hon. Nick Sherry’s assessment: “Australia has the world’s most successful pension system.”

Why do banks react differently to short-selling bans? Evidence from the Asia-Pacific area and the United States

The use of short-selling bans in different countries has greatly caught the attention of policy modelling. Our study is among the first studies to try to explain the phenomenon of different bank price reactions in terms of country and stock market conditions, looking at both the stock price reaction and risk. Overall, our findings suggest that the impacts of these bans on overall market efficiency were heterogeneous and, in most cases, modest for the countries analysed. Indeed, either we do not observe any improvements or the improvements are only short-lived. For the first time, we document that banks react differently to ban restrictions mostly because of differences in terms of their fundamental factors (balance sheet indicators). Given that Us and Asia-Pacific banks react differently to a ban on short selling depending on the particular financial structure of each market, when taking these actions, policy makers should consider which firm characteristics are most important and should pay attention to whether these interventions are effective in the market. Moreover, short-selling restrictions did not contribute to containing the volatility of the financial stocks subjected to the bans; on the contrary, our results indicate that negative volatility increased in some countries.

COVID-19, Short-selling Ban and Energy Stock Prices

We examine the short-selling ban imposed by the National Commission for Companies and the Stock Exchange of Italy, the authority that regulates the Italian securities market, on three Italian energy stocks. We find that the effect of the short-selling ban was temporary.