Short Selling Equity Exchange Traded Funds and its Effect on Stock Market Liquidity
The Journal of Financial and Quantitative Analysis
60 Pages Posted: 22 Jan 2017 Last revised: 20 Oct 2020
Date Written: October 14, 2020
Abstract
We examine short selling of equity exchange traded funds (ETFs) using the 2008 short-sale ban. Contrasting the previously documented contractions in bearish strategies during the ban, we find a significant increase in short sales of the largest, most liquid ETF, the S&P 500 Spider. We offer evidence suggesting this upsurge was driven primarily by investors circumventing the ban. We show that the ban’s detrimental effect on stock liquidity was around 30% less severe for the Spider’s constituents. Our results suggest that ETF shorts can substitute for short sales of individual stocks, thereby alleviating short-sale constraints’ adverse effect on liquidity.
Keywords: Exchange traded funds, ETFs, financial crisis, liquidity, regulation, SEC, short-sale ban.
JEL Classification: G14, G18, G28
Suggested Citation: Suggested Citation