Market Declines: Is Banning Short Selling the Solution?

20 Pages Posted: 7 Oct 2011 Last revised: 18 Sep 2012

See all articles by Robert H. Battalio

Robert H. Battalio

University of Notre Dame - Department of Finance

Hamid Mehran

Independent

Paul H. Schultz

University of Notre Dame - Department of Finance

Date Written: September 1, 2011

Abstract

In response to the sharp decline in prices of financial stocks in the fall of 2008, regulators in a number of countries banned short selling of particular stocks and industries. Evidence suggests that these bans did little to stop the slide in stock prices, but significantly increased costs of liquidity. In August 2011, the U.S. market experienced a large decline when Standard and Poor’s announced a downgrade of U.S. debt. Our cross-sectional tests suggest that the decline in stock prices was not significantly driven or amplified by short selling. Short selling does not appear to be the root cause of recent stock market declines. Furthermore, banning short selling does not appear to prevent stock prices from falling when firm-specific or economy-wide economic fundamentals are weak, and may impose high costs on market participants.

Keywords: short selling, down grade

JEL Classification: G01, G12, G14, G18

Suggested Citation

Battalio, Robert H. and Mehran, Hamid and Schultz, Paul H., Market Declines: Is Banning Short Selling the Solution? (September 1, 2011). FRB of New York Staff Report No. 518. Available at SSRN: https://ssrn.com/abstract=1939884 or http://dx.doi.org/10.2139/ssrn.1939884

Robert H. Battalio

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States
574-631-9428 (Phone)
574-631-5255 (Fax)

Hamid Mehran (Contact Author)

Independent ( email )

No Address Available

Paul H. Schultz

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States
219-631-3338 (Phone)
219-631-5255 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
199
rank
149,645
Abstract Views
1,465
PlumX Metrics