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Market Declines: What is Accomplished by Banning Short-Selling?

7 Pages Posted: 14 Aug 2012  

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: August 1, 2012

Abstract

In 2008, U.S. regulators banned the short-selling of financial stocks, fearing that the practice was helping to drive the steep drop in stock prices during the crisis. However, a new look at the effects of such restrictions challenges the notion that short sales exacerbate market downturns in this way. The 2008 ban on short sales failed to slow the decline in the price of financial stocks; in fact, prices fell markedly over the two weeks in which the ban was in effect and stabilized once it was lifted. Similarly, following the downgrade of the U.S. sovereign credit rating in 2011 — another notable period of market stress — stocks subject to short-selling restrictions performed worse than stocks free of such restraints.

Keywords: short selling, down grade

JEL Classification: G12, G14, G18, G01

Suggested Citation

Battalio, Robert H. and Mehran, Hamid and Schultz, Paul H., Market Declines: What is Accomplished by Banning Short-Selling? (August 1, 2012). Current Issues in Economics and Finance, Vol. 18, No. 5, 2012. Available at SSRN: https://ssrn.com/abstract=2128827 or http://dx.doi.org/10.2139/ssrn.2128827

Robert 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 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)

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