Price Inflation and Wealth Transfer During the 2008 SEC Short-Sale Ban
University of Southern California - Marshall School of Business - Finance and Business Economics Department; Institute for Quantitative Research in Finance (the Q-Group); Interactive Brokers, Inc. (IBKR); University of Pennsylvania - Financial Economists Roundtable
University of California, Berkeley - Haas School of Business
University of Waterloo
June 18, 2009
The Journal of Investment Management, Second Quarter, 2013
Harry M. Markowitz Special Distinction Award 2013
Using a factor-analytic model that extracts common valuation information from the prices of stocks that were not banned, we estimate that the ban on short-selling financial stocks imposed by the SEC in September 2008 led to substantial price inflation in the banned stocks. The inflation reversed somewhat following the ban, but the data are too noisy to conclusively link the reversal to the ban. Other factors such as the pending TARP legislation may also have affected prices, though our results suggest that it was not a significant factor. If prices were inflated, buyers paid more than they otherwise would have paid for the banned stocks during the period of the ban. We provide an estimate of $4.9 billion for the resulting wealth transfer from buyers to sellers. Such transfers should interest policymakers concerned about maintaining fair markets.
Number of Pages in PDF File: 43
Keywords: Short-sale Ban, SEC, Securities and Exchange Commission, Short-Sale Constraints, Financial Crisis
JEL Classification: G12, G14, G18, G28
Date posted: March 23, 2009 ; Last revised: May 9, 2014
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