Short Selling Bans Generally Don’t Work!

Short Selling Bans Generally Don’t Work!

January 17, 2013 Research Insights
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(Last Updated On: January 13, 2017)

Public Service Announcement:

To all the free-market pro-competition haters of the world that believe government regulation solves all our problems, please read the following paper.

Short-Selling Bans Around the World: Evidence from the 2007–09 Crisis

Abstract:

Most regulators around the world reacted to the 2007-09 crisis by imposing bans or constraints on short-selling. These were imposed and lifted at different dates in different countries, often applied to different sets of stocks and featured varying degrees of stringency. We exploit this variation in short-sales regimes to identify their effects on liquidity, price discovery and stock prices. Using panel and matching techniques, we find that bans (i) were detrimental for liquidity, especially for stocks with small capitalization and no listed options; (ii) slowed down price discovery, especially in bear markets, and (iii) failed to support prices, except possibly for U.S. financial stocks [Author comment: Did we really need to support the largest leaches known to mankind?].

Data Sources:

Daily data for 16,491 stocks in 30 countries from January 2008 to June 2009.

Comment:

Bid/Ask spreads increase:

SSRN-id1502184
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

 

Price discovery sucks:

1And crappy stocks get overvalued:

st
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

 

Key Takeaway: Stay out of the Markets, Mr. Government.

 


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Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.