Price Inflation and Wealth Transfer During the 2008 SEC Short-Sale Ban

The Journal of Investment Management, Second Quarter, 2013

Harry M. Markowitz Special Distinction Award 2013

43 Pages Posted: 23 Mar 2009 Last revised: 9 May 2014

Lawrence Harris

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

Ethan Namvar

University of California, Berkeley - Haas School of Business; Columbia Business School

Blake Phillips

University of Waterloo

Multiple version iconThere are 2 versions of this paper

Date Written: June 18, 2009

Abstract

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.

Keywords: Short-sale Ban, SEC, Securities and Exchange Commission, Short-Sale Constraints, Financial Crisis

JEL Classification: G12, G14, G18, G28

Suggested Citation

Harris, Lawrence and Namvar, Ethan and Phillips, Blake, Price Inflation and Wealth Transfer During the 2008 SEC Short-Sale Ban (June 18, 2009). The Journal of Investment Management, Second Quarter, 2013. Available at SSRN: https://ssrn.com/abstract=1364390 or http://dx.doi.org/10.2139/ssrn.1364390

Lawrence Harris

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6496 (Phone)
213-740-6650 (Fax)

Institute for Quantitative Research in Finance (the Q-Group) ( email )

Q Group
P.O. Box 1540
Valley Stream, NY 11582
United States

Interactive Brokers, Inc. (IBKR) ( email )

209 South LaSalle Street
10th Floor
Chicago, IL 60604
United States

University of Pennsylvania - Financial Economists Roundtable ( email )

Philadelphia, PA
United States

Ethan Namvar (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-7989 (Phone)

HOME PAGE: http://haas.berkeley.edu

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Blake Phillips

University of Waterloo ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

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