Short Selling Bans and Institutional Investors' Herding Behavior: Evidence from the Global Financial Crisis
29 Pages Posted: 23 Jan 2011 Last revised: 11 Oct 2011
Date Written: July 30, 2011
The literature on short selling restrictions focuses mainly on a ban's impact on market efficiency, liquidity and overpricing. Surprisingly, little is known about the effects of short selling restrictions on institutional investors' trading behavior.Since institutional investors dominate mature stock markets and mainly use short sales, constraining these traders may in influence the asset pricing process. We investigate six stock markets facing bans associated with the recent global financial crisis. Our empirical evidence shows that short selling restrictions exhibit either no in influence on herding behavior or induce adverse herding. This implies a higher dispersion of returns around the market compared to rational asset pricing which can be interpreted as an increase in uncertainty in stock markets.
Keywords: Short Selling Ban, Herding, Herding Measure, Bootstrapping
JEL Classification: G12, G14, G15, G18
Suggested Citation: Suggested Citation