Short-Sale Constraints and Efficiency of the Spot-Futures Dynamics

Abstract

This paper studies the spot and futures cross-market efficiency implications of the regulatory short-selling constraints imposed during the 2008-2009 financial crisis. We find the equilibrium position for the basis during the ban is below that normally seen, with the spot price higher relative to the futures price. This suggests that holding the spot was more valuable than holding the futures during the ban period. Further, we find the speed of adjustment has slowed down and in some cases become statistically insignificant, suggesting arbitrage is less effective during the ban period. The results presented here have implications for regulators and traders regarding the efficiency of these markets during a short-sale ban.

Keywords: Short-sale constraints, Short-selling, Arbitrage, Mispricing

JEL Classification: G13, G14