Short-selling Bans Research Articles

2008 SEC Short Selling Ban: Impacts on the Credit Default Swap Market

On September 17, 2008, the Securities and Exchange Commission (SEC) issued an emergency order banning the shorting of 797 financial stocks. This paper studies the impact of the short selling ban on the credit derivatives market by investigating credit default swap (CDS) prices during the period that the ban was in effect. The hypothesis is proposed that the short selling ban on 797 financial stocks led market participants to enter CDS contracts to reflect positions that the participants had formerly entered through short sales, thus driving up CDS rates. Analysis compares the CDS prices of firms protected by the ban to the CDS prices of similar firms in the S&P 500 not covered by the ban. Tests are also conducted using metrics from the bond and equities markets to determine if the results from the CDS market are unique to the CDS space. A linear regression technique is used to test the significance of the ban on CDS prices. The study results indicate that the CDS prices of firms covered by the short selling restrictions experienced significant dislocations during the period of the ban.

Short-sales constraints and market quality: Evidence from the 2008 short-sales bans

Using data from fourteen equity markets, this study empirically examines the impact of the 2008 short-selling bans on market quality. Evidence indicates that restrictions on short-selling lead to artificially inflated prices, indicated by positive abnormal returns. This is consistent with Miller's (1977) overvaluation theory, and suggests that the bans are effective in temporarily stabilizing prices in struggling financial stocks. Market quality is reduced during the restrictions, as evidenced by wider bid-ask spreads, increased price volatility and reduced trading activity. While these effects are strong, regulators may view the deterioration in market quality as a necessary by-product of the bans to maintain prices and protect investors.

Short Selling Bans and Institutional Investors' Herding Behavior: Evidence from the Global Financial Crisis

The literature on short selling restrictions focuses mainly on a ban's impact on market efficiency, liquidity and overpricing. Surprisingly, little is known about the effects of short selling restrictions on institutional investors' trading behavior.Since institutional investors dominate mature stock markets and mainly use short sales, constraining these traders may in influence the asset pricing process. We investigate six stock markets facing bans associated with the recent global financial crisis. Our empirical evidence shows that short selling restrictions exhibit either no in influence on herding behavior or induce adverse herding. This implies a higher dispersion of returns around the market compared to rational asset pricing which can be interpreted as an increase in uncertainty in stock markets.

Multivariate GARCH Analysis of Fannie Mae, Freddie Mac, and American International Group: Did the Short-Selling Ban Reduce Their Systemic Risk?

Multivariate GARCH Analysis of Fannie Mae, Freddie Mac, and American International Group: Did the Short-Selling Ban Reduce Their Systemic Risk?

Restricted private information provision during short sale bans

PurposeThe purpose of this paper is to examine the 2008 SEC short selling ban on financial firms and whether this ban negatively impacted private information provision in these short‐restricted equities.Design/methodology/approachThis paper employs the French and Roll Variance Ratio (VR) as a proxy for private information provision in both an unconditional and conditional analysis. The unconditional analysis examines the VR across trading characteristics, firm characteristics, and time regimes. The conditional analysis models the VR in an event study framework where exogenous determinants of private information provision are held constant.FindingsEmpirical results indicate that private information provision increased due to the 2007 US financial crisis while information provision decreased due to the 2008 short selling ban. This study concludes that the 2007 financial crisis enticed informed short sellers into the market which then increased information provision. Further, the 2008 short selling ban restricted these informed short sellers from the market thus leading to a decrease in information provision in the short‐restricted firms. Interestingly, the information restricting effects of the 2008 ban were not severe enough to erode the gains in information provision originally induced by the financial crisis.Originality/valueThis paper specifically contributes by demonstrating that the 2008 SEC short selling ban negatively impacted private information provision. This paper contributes generally by showing that short sale bans' information effects are not completely restrictive. Rather, short sale bans' information effects are a function of firm characteristics and contemporaneous market conditions.

Structural and Market Efficacy Implications of the Short-Sell Ban in Europe

This article seeks to estimate the impact of the ban imposed on short selling by various market regulators across Europe in late 2008, at the peak of the financial crisis. The authors select the STOXX 600 constituents as their universes and do an event study of the ban period, in contrast with the preand post ban-period for the same universe of stocks. In particular, the article reports what impact the ban had, if any, on the efficiency of the market (abnormal returns, volatility, etc.) and market microstructure variables (spread, shape of the order book, etc.), using tick data from Reuters. The authors find a deleterious effect on both sets of variables during the ban, even after controlling for the general crisis like market environment (using STOXX 600 stocks not under the purview of the ban). <b>TOPICS:</b>Exchanges/markets/clearinghouses, volatility measures

Cross Market Effects of Stocks Short-Selling Restrictions: Evidence from the September 2008 Natural Experiment

Using intraday data, this paper investigates empirically the joint stock and corporate bond markets responses to the September 2008 stocks short sell ban. The study intends to exploit the natural experiment in order to asses the impact of the stock market short sale restrictions (stock market liquidity shock) on corporate bond market variables during the fi nancial crisis period. The short sell ban was one of the levers that regulators pulled in order to manage the fi nancial crisis. The economic question is whether this lever worked or should have been pulled given the complexity of financial market linkages and news dissemination. Recent financial events suggested that, when market conditions are severe, liquidity can rapidly decline or even disappear. Liquidity shocks are the potential channel through which asset prices are influenced by liquidity.However, the standard theoretical equilibrium asset pricing models do not consider trading and thus ignore the time and cost of transforming cash into financial assets and vice versa hence ignoring the impact of the liquidity shocks. Therefore, investigating liquidity shocks empirically, their transmission across markets is of high interest especially during times of high turbulence as we recently witnessed. We use vector autoregression (VAR) approach to model stock and corporate bond returns, volatilities and transaction costs simultaneously, obtaining an econometric reduced form that incorporates causal and feedback effects among the two markets variables. Using VAR tools, we found that shocks in stock market (short sell ban) had a signifi cant negative impact on corporate bond market variables during the time under investigation.

Should Short-Selling Be Restricted During a Financial Crisis?

This paper investigates the short selling of financial company stocks around the time of the SEC September 2008 short-selling ban. More specifically, this paper examines whether this short selling, mainly by hedge funds and other types of sophisticated investors, was purely speculative or whether it was driven by rational behavior in response to a financial company's risk exposure, such as its holdings of subprime-related assets and its credit risk exposure. Our results show that during the crisis period the short-selling of financial firms stock was not significantly greater than that of non-financial firms, even after controlling for size and risk. More importantly, our results show that short sellers rationally short sold those financial company stocks with the greatest subprime and insolvency risk exposures. This finding has important implications regarding banning short selling, since it suggests that such a regulation may mute the disciplining effects of investors in the financial market on those financial companies with the greatest risk exposures and would be contrary to the intentions of bank regulators who have emphasized an increased reliance on market discipline.

The Effect of the Ban on Short Selling on Market Efficiency and Volatility

In this paper we examine the effects of the short selling ban on trading of financial stocks imposed by Australian regulators in the wake of the global financial crisis. Unlike other developed markets where regulators imposed short-selling restrictions mostly for brief periods of time at the height of the financial crisis the ban on short selling of financial stocks on the Australian Stock Exchange lasted eight months and covered both the tumultuous end of 2008 and the calmer period up to May 2009. Our control group consists of matched Canadian financial institutions which were unaffected by the short selling ban. We examine the impact of the imposed short selling constraints on measures of market quality and stock prices with univariate and multivariate fixed effects panel regressions. As forecast by previous theoretical work we find that stocks subject to the short selling ban suffered a comparatively severe degradation in market quality. Controlling for the adverse effects of the financial crisis on financial markets we show that contrary to popular belief imposing constraints on short-selling reduced trading activity, increased bid and ask spreads and increased intraday volatility, while there appears to be no evidence for lasting price support from the restrictions.

Structural and Market Efficacy Implications of the Short-Sell Ban in Europe

Structural and Market Efficacy Implications of the Short-Sell Ban in Europe

Convertible Bond Arbitrageurs as Suppliers of Capital

This article examines the potential impact of capital supply on security issuance. We focus on the role of convertible bond arbitrageurs as suppliers of capital to convertible bond issuers. We estimate a simultaneous equations model of demand and supply of convertible bond capital, linking the time series of aggregate convertible bond issuance to measures of capital supply: convertible bond arbitrage hedge fund flows, returns, and a proxy for arbitrageurs' use of leverage. We find that issuance is positively and significantly related to increases in all three supply measures. To provide further interpretation, we use the September/October 2008 short-selling ban as a natural experiment to examine the impact of an exogenous shock to the supply of capital from arbitrageurs. Results from both empirical approaches provide evidence that the supply of capital from convertible bond arbitrageurs impacts issuance. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

The Effect of the Ban on Short Selling on Market Efficiency and Volatility

We examine the effects of the short selling ban, imposed by Australian regulators in the wake of the global financial crisis, on trading of financial stocks. Unlike other developed markets, where regulators imposed short-selling restrictions for brief periods of time at the height of the financial crisis, the ban on short selling of financial stocks on the Australian Stock Exchange lasted eight months, including both the tumultuous end of 2008 and the calmer period up to May 2009. Our control group consists of matched Canadian financial institutions which were unaffected by a short selling ban. We analyze the impact of the imposed short selling constraints on measures of market quality and on stock prices using univariate and multivariate fixed effects panel regressions. As predicted by previous theoretical work, we find that stocks subject to the short selling ban suffered a severe degradation in market quality. Controlling for the adverse effects of the financial crisis on financial markets, we show that imposing constraints on short-selling reduced trading activity, increased bid and ask spreads and increased intraday volatility. Moreover, there appears to be no evidence for lasting price support from the restrictions. JEL Classifications: G01, G14, G18

Short sale update: SEC extends emergency actions through extraordinary rulemaking; US short selling ban expires

Purpose – This paper aims to provide a detailed description of the four releases issued by the US Securities and Exchange Commission (the “SEC”) on October 14 and 15, 2008 in connection with the three SEC emergency orders that were adopted on September 17 and 18, 2008, relating to the regulation of short selling.

Short Selling Bans and Market Liquidity around the World: Evidence from the 2007-09 Crisis

Most stock exchange regulators around the world have reacted to the financial crisis of 2007-2009 by imposing bans or regulatory constraints on short-selling by market participants. We use the large amount of evidence generated by the introduction and lifting of these bans to investigate the effects of short-selling bans on liquidity and price discovery. The enactment and lifting of bans at different dates in different countries, in some countries for financial stocks only, and often with different degrees of stringency, enables us to use panel data techniques to investigate their effects. We also investigate the cross-sectional effect of bans on liquidity of stocks with different market capitalization and different volatility. Finally, we analyze the effect of bans on other measures of market quality, such as price discovery and the skewness of stock returns. Short-selling is an integral part of the trading strategies of institutional investors, in particular hedge funds. Our research has the potential to show to regulators that banning short selling has detrimental effects on market quality and, as a result, it is not an appropriate policy action.