Are Short Sellers Positive Feedback Traders? Evidence from the Global Financial Crisis

33 Pages Posted: 5 Sep 2011 Last revised: 1 Dec 2012

See all articles by Martin T. Bohl

Martin T. Bohl

University of Muenster

Arne Christian Klein

University of Muenster

Pierre L. Siklos

Wilfrid Laurier University - School of Business & Economics; Balsillie school of international affairs

Date Written: November 20, 2012

Abstract

Short sellers are routinely blamed for destabilizing stock markets by exacerbating deviations from fundamental values. In response, regulators periodically impose short sale constraints aimed at preventing excessive stock market declines. One explanation is that policy makers regard short sellers as behaving like positive feedback traders. Relying on the theoretical model put forward by Sentana and Wadhwani (1992), which stresses the conditional nature of returns' persistence, bans on selected financial stocks in six countries during the 2008/2009 global financial crisis are examined. These provide us with a setting to analyze the impact of short sale restrictions on feedback trading. Our findings suggests that, in the majority of markets examined, restrictions of this kind amplify positive feedback trading during periods of high volatility and, hence, contribute to stock market downturns. On balance then, short selling bans do not contribute to enhancing financial stability.

Keywords: Short Selling Ban, Short Sales, Feedback Trading, Financial Crisis

JEL Classification: G10, G12, G14, G15, G18

Suggested Citation

Bohl, Martin T. and Klein, Arne Christian and Siklos, Pierre L., Are Short Sellers Positive Feedback Traders? Evidence from the Global Financial Crisis (November 20, 2012). Journal of Financial Stability, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1922828 or http://dx.doi.org/10.2139/ssrn.1922828

Martin T. Bohl (Contact Author)

University of Muenster ( email )

Schlossplatz 2
D-48149 Muenster, D-48149
Germany

Arne Christian Klein

University of Muenster ( email )

Schlossplatz 2
Muenster, D-48149
Germany

Pierre L. Siklos

Wilfrid Laurier University - School of Business & Economics ( email )

Department of Economics
75 University Avenue W.
Waterloo, Ontario N2L 3C5
Canada
519-884-0710 Ext.. 3491 (Phone)

HOME PAGE: http://pierrelsiklos.com

Balsillie school of international affairs ( email )

67 Erb Street West
Waterloo, ON N2L 6C2
Canada

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