The Impact of Short -Sale Restrictions on Volatility, Liquidity, and Market Efficiency: The Evidence from the Short-Sale Ban in the U.S.

38 Pages Posted: 17 Mar 2010

See all articles by Olesya Lobanova

Olesya Lobanova

Florida International University (FIU) - Department of Finance

Shahid S. Hamid

Florida International University (FIU) - Department of Finance

Arun J. Prakash

Florida International University (FIU) - Department of Finance; Florida International University

Date Written: March 15, 2010

Abstract

On September 19, 2008 the Securities and Exchange Commission put a temporary ban on the short sales of 797 financial stocks. This unprecedented measure allows us to explore the impact of short-sale restrictions on the U.S. stocks. In this study we investigate the effect of short-sale constraints on volatility, liquidity and market efficiency. The results suggest there were statistically significant changes in liquidity, volume, and return volatility while the ban was in effect. We find that market liquidity deteriorated substantially, t quoted spread and percent quoted spread increased significantly, while turnover ratio, trading volume, and dollar volume declined during the ban. Furthermore, returns decreased and volatility of returns measured by squared returns increased during the restriction on shorting activity. Therefore, a significant drop in market efficiency is documented.

Keywords: short sale ban, financial crisis, market efficiency

JEL Classification: G1

Suggested Citation

Lobanova, Olesya and Hamid, Shahid and Prakash, Arun Jai, The Impact of Short -Sale Restrictions on Volatility, Liquidity, and Market Efficiency: The Evidence from the Short-Sale Ban in the U.S. (March 15, 2010). Available at SSRN: https://ssrn.com/abstract=1571601 or http://dx.doi.org/10.2139/ssrn.1571601

Olesya Lobanova

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Shahid Hamid (Contact Author)

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street College of Business
Miami, FL 33199
United States
305-348-2727 (Phone)

Arun Jai Prakash

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Florida International University ( email )

Miami, FL 33199
United States

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