Do Short Selling Restrictions Destabilize Stock Markets? Lessons from Taiwan

28 Pages Posted: 27 Apr 2011 Last revised: 20 Jul 2022

Date Written: April 27, 2011

Abstract

This working paper was written by Martin T. Bohl (Westfälische Wilhelms-University Münster), Badye Essid (Centre for International Governance Innovation) and Pierre L. Siklos (Wilfrid Laurier University).

Short sellers have been routinely blamed for triggering, or exacerbating, stock market declines. The experience of Taiwan provides an interesting case study of the impact of short selling bans on stock returns volatility in a time series framework due to the length of time the short selling ban was in place there. Estimating several variants of an asymmetric GARCH model and a Markov switching GARCH model we find robust evidence that short selling restrictions raise stock returns volatility. The only qualifier is that the impact of short sale bans is a feature of the expansionary phase of business cycles. During recessions this effect dissipates.

Keywords: Short-Selling Bans, Taiwanese Stock Market, Asymmetric GARCH Models, Markov Switching Models

JEL Classification: G12, G14, G18

Suggested Citation

Research, Hong Kong Institute for Monetary and Financial, Do Short Selling Restrictions Destabilize Stock Markets? Lessons from Taiwan (April 27, 2011). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 11/2011, Quarterly Review of Economics and Finance, Vol. 52, No. 2, 2012, Available at SSRN: https://ssrn.com/abstract=1824102 or http://dx.doi.org/10.2139/ssrn.1824102

Hong Kong Institute for Monetary and Financial Research (Contact Author)

Hong Kong Institute for Monetary and Financial Research ( email )

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