Abstract

http://ssrn.com/abstract=1597741
 
 

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


Cristina Danciulescu


Trondheim Business School

November 13, 2009

Center for Applied Economics and Policy Research Working Paper No. 005-2010

Abstract:     
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.

Number of Pages in PDF File: 43

Keywords: Corporate Bonds, Stocks, Short-Sale Restrictions, Cross Markets eff ects

JEL Classification: C12, C32, G01, G18

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Date posted: April 29, 2010  

Suggested Citation

Danciulescu, Cristina, Cross Market Effects of Stocks Short-Selling Restrictions: Evidence from the September 2008 Natural Experiment (November 13, 2009). Center for Applied Economics and Policy Research Working Paper No. 005-2010. Available at SSRN: http://ssrn.com/abstract=1597741 or http://dx.doi.org/10.2139/ssrn.1597741

Contact Information

Cristina Danciulescu (Contact Author)
Trondheim Business School ( email )
Jonsvannsveien 82
Trondheim, N-7004
Norway
4773559966 (Phone)
4773559978 (Fax)
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