Short-Sale Constraints and Financial Stability: Evidence from the Spanish Market

40 Pages Posted: 24 Jun 2012 Last revised: 21 May 2014

Date Written: April 2014

Abstract

We examine the effect of the short-selling ban implemented in 2011 on Spanish stocks on the level of risk in the banking sector. Before the ban, short positions are found to be positive and significantly related to the creditworthiness of medium-sized banks, less internationally diversified and more reliant on official support. We show that the ban helped stabilise the credit risk of medium-sized banks, especially of those more exposed to short-sellers’ activity, but not that of large banks and non-financial firms. This stabilising effect came at the cost of a significantly sharp decline in liquidity, trading and price efficiency of medium-sized banks’ stocks relative to the rest of the stocks.

Keywords: short-sales constraint, financial stability, market quality

JEL Classification: E44, G14, G18

Suggested Citation

Arce, Oscar and Mayordomo, Sergio, Short-Sale Constraints and Financial Stability: Evidence from the Spanish Market (April 2014). Available at SSRN: https://ssrn.com/abstract=2089730 or http://dx.doi.org/10.2139/ssrn.2089730

Oscar Arce

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Sergio Mayordomo (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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