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1 – 10 of 89Jaemin Kim, Joon-Seok Kim and Sean Sehyun Yoo
The authors investigate the 2008-2009 short-sales ban in Korea, one of the most comprehensive and restrictive short-selling bans worldwide. The purpose of this paper is to…
Abstract
Purpose
The authors investigate the 2008-2009 short-sales ban in Korea, one of the most comprehensive and restrictive short-selling bans worldwide. The purpose of this paper is to examine: whether the ban stopped a destabilizing effect, if there was any, of short-selling activities; whether the ban improved or deteriorated the informational efficiency or the price discovery process of the stock market; and whether the ban had any impact on market liquidity.
Design/methodology/approach
Multiple regression; vector autoregression analysis; and generalized autoregressive conditional heteroskedasticity analysis.
Findings
The authors find no evidence that short-sales have a market-destabilizing effect and thus, restricting short-selling has a market-stabilizing effect. On the contrary, the short-selling ban is associated with an increase in return volatility and a deterioration of the price discovery process, particularly for the stocks without derivatives traded on them. The authors also find evidence of a liquidity decrease for short-sale intensive stocks. However, the evidence is inconclusive as to whether the market efficiency and liquidity changes are solely the result of the short-sales ban or the compound effects of both the ban and the concurrent progress of the financial crisis.
Originality/value
The literature does not provide a conclusive view on the effects of short-sales or restrictions thereof on the stock market. Also, the existing research on recent worldwide shorting bans often lack empirical scope (e.g. 32 stocks for UK; three weeks for USA). In contrast, the short-sales ban in the Korean stock market, one of the most comprehensive and restrictive short-selling bans worldwide, lasted for eight months for all the listed stocks and is still in effect for financial stocks. The authors find no evidence that short-sales have a market-destabilizing effect and thus, restricting short-selling has a market-stabilizing effect.
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Laurence Copeland and Joseph T. Elliott
The paper aims to investigate the effectiveness of the ban on short trading of stocks on the London Stock Exchange, introduced in September 2008 in the immediate aftermath of the…
Abstract
Purpose
The paper aims to investigate the effectiveness of the ban on short trading of stocks on the London Stock Exchange, introduced in September 2008 in the immediate aftermath of the collapse of Lehman Brothers. In particular, the paper investigates how far the ban succeeded in achieving the objectives set out by the regulator, the Financial Services Authority (FSA).
Design/methodology/approach
The approach involves comparing the returns on a portfolio of stocks covered by the short-sales ban with a portfolio of financial stocks exempt from the ban as a control group.
Findings
The paper presents evidence to show the effects to the ban to have been mostly confined to a large first-day return. Beyond that, there is some evidence that volatility was diverted from stocks covered by the ban to those for which short-sales were still permitted. Investors seem to have been wary of buying banned stocks when good news arrived, presumably out of fear that they may be overpriced.
Research limitations/implications
All event studies are subject to the curse of the counterfactual: what would have happened if the event had not occurred? The problem is especially acute here, however, because the background was the most turbulent in modern economic and financial history.
Practical implications
The paper shows the limited value of short-sales bans over anything beyond the very short-term.
Originality/value
This paper helps to inform regulatory decision-making in financial crises.
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– The purpose of this paper is to explore the impact of institutional trading on the market quality during the financial crisis and short sale ban.
Abstract
Purpose
The purpose of this paper is to explore the impact of institutional trading on the market quality during the financial crisis and short sale ban.
Design/methodology/approach
The following methods was applied to discuss the total impact on market quality and efficiency of short sale ban in USA from 2001 to 2010. The author examined institutional ownership and breadth of ownership while performing a mean variance tests for changes in efficiency as well as multivariate analysis.
Findings
Analyzing USA, Standard and Poor’s 500 stocks the author find increase high-low volatility, realized volatility, effective spread and relative quoted spread during January 1, 2007 to December 31, 2010. Realized volatility increases for both small and large quantile stocks. High-low volatility increases for small quantile stocks and relative quoted spread increases for large quantile stocks. Comparing the percentage change between pre and climax period we find that large quantile stocks have a negative association between breadth of institutional ownership and returns and a positive relation high-low volatility, realized effective spread and quoted spread to returns.
Originality/value
The present paper is the first to discuss the total impact on market quality and efficiency of short sale ban in USA from 2001 to 2010. The author find a remarkable improvement in market efficiency (variance ratios) after the crisis period for small and non-financial stocks, while the price efficiency lost during the crisis period is more persistent for large and financial stocks.
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Saqib Sharif, Hamish D. Anderson and Ben R. Marshall
The purpose of this paper is to investigate how the announcement and implementation of short sales and margin trading regulation affects Chinese stock returns and trading volume…
Abstract
Purpose
The purpose of this paper is to investigate how the announcement and implementation of short sales and margin trading regulation affects Chinese stock returns and trading volume. On 31 March 2010, the Chinese regulators launched a pilot programme, allowing short sales and margin trading for 50 Shanghai Stock Exchange and 40 Shenzhen Stock Exchange stocks.
Design/methodology/approach
This paper uses an event study approach to compare market model abnormal returns (ARs) of the pilot firms with two distinct matched firm samples. A volume event study is also conducted to examine abnormal trading activity surrounding the key events in the pilot stocks.
Findings
Negative ARs follow both the announcement and implementation of short selling and margin trading. This suggests the negative impact of short sales dominates the positive impact of margin trading on an average. Volume also declines, which is consistent with uninformed investors’ seeking to avoid trading against informed traders.
Originality/value
The paper appears to be the first to address the impact of both the announcement and implementation of short selling and margin trading rule changes on returns and liquidity using individual stock data.
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The aim of this paper is to provide a review of the literature on short selling. In particular, it seeks to describe the history of short selling and anti-shorting laws. With…
Abstract
Purpose
The aim of this paper is to provide a review of the literature on short selling. In particular, it seeks to describe the history of short selling and anti-shorting laws. With respect to short-selling regulation, the main emphasis will be placed on the UK FSA’s regulatory action.
Design/methodology/approach
This paper reviews the history of short selling and the development of anti-shorting laws, particularly with regard to the UK market. It also analyses the distinct literature on short selling.
Findings
The paper argues that the development of anti-shorting laws shows that regulators are instituting a policy unfavourable to short sellers. The opposers of short selling may be seen as lacking ideas and having the tendency to ban anything they do not like. Short sellers, on the other hand, may be seen as the elite bodyguards of the financial market whose job is to get rid of overvalued stocks, and ultimately keep the market safe and efficient. For this reason, short sellers deserve our praise and thanks, not our hatred and opprobrium.
Originality/value
To the authors’ knowledge, this paper is the first to review the history of short selling and the development of anti-shorting laws, particularly with regard to the UK market.
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The purpose of this paper is to take advantage of a natural experiment in Taiwan to test the effect of short‐sales constraints on price dynamics.
Abstract
Purpose
The purpose of this paper is to take advantage of a natural experiment in Taiwan to test the effect of short‐sales constraints on price dynamics.
Design/methodology/approach
Since September 1998, short‐selling is banned at a price below the close price of the previous trading day. The new rule creates unique daily dynamics of short‐sales constraints. The paper employs a difference‐in‐difference method to evaluate whether the short‐sales constraint rule plays an important role in the price dynamics.
Findings
The results show that stock prices react to information in a way similar to if short‐selling was not banned. This is in line with the implication of a rational expectation framework like Diamond and Verrecchia.
Research limitations/implications
The paper has implications on the short selling bans in the 2008/2009 credit crisis and the European debt crisis because the bans are public information as those in this setting. The rational agents in the market could incorporate the bans into price beliefs which could lead to the ineffectiveness of the policy. The short‐sales constraints may be widely imposed in the crisis but they are not the effective tools to alleviate downward price pressures.
Practical implications
The results suggest that the effort of the government to boost stock price by imposing short sales constraints will not be effective if rational investors take the constraints into account while forming their beliefs.
Originality/value
Unlike existing short‐sales constraint proxies like short interest or lending fees, the dynamic constraints do not suffer from endogeneity. Moreover, the constraints are public information and thus ideal for testing the rational expectation models, in which investors have to be aware of the level of the constraints.
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This study delves into the nuanced implications of short-sale constraints on stock prices within the context of stock market efficiency. While existing research has explored this…
Abstract
Purpose
This study delves into the nuanced implications of short-sale constraints on stock prices within the context of stock market efficiency. While existing research has explored this relationship, inconsistencies persist in their findings. The purpose of this study is to conduct a comprehensive review of literature to elucidate the reasons behind these disparities.
Design/methodology/approach
A systematic review of existing theoretical and empirical studies was conducted following the PRISMA method. The analysis centered on discerning the factors contributing to the divergence in projected stock prices due to these constraints. Key areas explored included assumptions related to expectations homogeneity, revisions, information uncertainty, trading motivations and fluctuations in supply and demand of risky assets.
Findings
The review uncovered multifaceted reasons for the disparities in findings regarding the influence of short-sale constraints on stock prices. Variations in assumptions related to market expectations, coupled with fluctuations in perceived information uncertainty and trading motivations, were identified as pivotal factors contributing to differing projections. Empirical evidence disparities stemmed from the use of proxies for short-sale constraints, varied sample periods, market structure nuances, regulatory changes and the presence of option trading.
Originality/value
This study emphasizes the significance of not oversimplifying the impact of short-sale constraints on stock prices. It highlights the need to understand these effects within the broader context of market structure and methodological considerations. By delineating the intricate interplay of factors affecting stock prices under short-sale constraints, this review provides a nuanced perspective, contributing to a more comprehensive understanding in the field.
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Michael Devaney and William L. Weber
The purpose of this paper is to investigate the effects of the 2008 SEC short‐sell moratorium on regional bank risk and return. The paper also examines the decline in “failures to…
Abstract
Purpose
The purpose of this paper is to investigate the effects of the 2008 SEC short‐sell moratorium on regional bank risk and return. The paper also examines the decline in “failures to deliver” securities in the wake of SEC short‐sell moratorium.
Design/methodology/approach
In total, six regional bank portfolios are derived and the beta coefficients from a CAPM model are estimated using the integrated generalized autoregressive conditional heteroskedasticity (IGARCH) method accounting for the short‐sell moratorium. Data on 110 regional banks in six US regions from January 2002 to December 30, 2011 are used to estimate the model.
Findings
The ban on naked short selling and the SEC short‐sell moratorium significantly increased individual bank risk for a majority of banks in six geographic regions, but also increased return in three of three regions. There was also reduced naked short selling as failures to deliver securities declined sharply after the September 2008 moratorium took effect.
Originality/value
Regional banks have generally not achieved the size needed to be deemed “too big to fail” by policy‐makers. Thus, policy changes such as the SEC short‐sell moratorium might be expected to have larger effects on regional banks than on larger banks, which might be shielded from the policy change by having achieved “too big to fail” status. The authors' results are consistent with research that has shown that short‐sell restrictions increase risk by reducing liquidity and trading volume.
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The relationship between short selling, market volatility and liquidity remains an object of intensive research. However, empirical evidence is yet to provide a conclusive…
Abstract
Purpose
The relationship between short selling, market volatility and liquidity remains an object of intensive research. However, empirical evidence is yet to provide a conclusive elucidation of this relationship by examining aspects of market fragmentation in the form of different market settings, different timing and different stocks under coverage, among others. This paper aims to contribute to the debate by investigating the impact of short selling on market volatility and liquidity in the Athens Exchange (ATHEX) under three different periods of short sales restrictions.
Design/methodology/approach
Two hypotheses are tested using econometric methodologies (co-integration and Granger-causality tools).
Findings
The empirical results indicate that when short selling is allowed, aggregate stock returns are in the short-term more volatile, but the liquidity of the market is not significantly affected. This might be the result of significant imbalances between supply and demand of stock caused by short-selling restrictions, leading to market price fluctuations.
Research limitations/implications
The analysis of empirical evidence needs further expansion and association with institutional firm-level and country-level elements to provide a more comprehensive understanding of the impact of short selling on market volatility and liquidity.
Practical implications
Stock market regulation involving short-selling restrictions have different implications according to extent and degree of stringency of the restrictions as well as the market on which they are imposed. That is especially important for the assessment of the market impact of the recent European Union regulation on short selling that has been imposed upon all EU member-States alike.
Social implications
Financial regulation policy must balance the benefits and costs for retail investors of imposing short-selling restrictions on stock market trading.
Originality/value
First-time empirical evidence is provided on the impact of short selling regulations on market volatility and liquidity of ATHEX highlighting the potential effectiveness of regulation policy.
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Yiuman Tse and Michael Williams
The 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…
Abstract
Purpose
The 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/approach
This 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.
Findings
Empirical 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/value
This 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.
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