The 2011 European Short Sale Ban: A Cure or a Curse?

Journal of Financial Stability, Vol. 25, 2016

43 Pages Posted: 9 Feb 2013 Last revised: 12 Jan 2017

See all articles by Luiz F. F. Felix

Luiz F. F. Felix

APG Asset Management

Roman Kräussl

Luxembourg School of Finance; Hoover Institution, Stanford University

Philip A. Stork

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Date Written: July 19, 2015

Abstract

This paper examines whether the 2011 European short sale ban on financial stocks proved to be successful or had a negative impact on financial markets. We explicitly take an options market perspective and focus on market participants’ changes in beliefs and expectations. During the ban, short positions in banned stocks decreased, whereas they increased for non-banned stocks. Our results indicate that the ban increased implied jump risk levels, thereby negatively impacting the banned financial stocks. However, we also observe that after the announcement of the ban, financial contagion risk actually dropped for banned stocks. Instead of a substitution effect between regular short selling and synthetic shorting through single stock puts, we observe a migration out of single stock puts into the EuroStoxx 50 index options market. We conclude that this type of migration diversified selling pressure initially concentrated in financial stocks across a larger share of the stock market, thereby reducing systemic risks and enhancing overall financial stability.

Keywords: Short sale ban; jump risk; risk-neutral density; implied volatility skew; contagion risk

JEL Classification: G01; G14; G28

Suggested Citation

Felix, Luiz F. F. and Kraeussl, Roman and Stork, Philip A., The 2011 European Short Sale Ban: A Cure or a Curse? (July 19, 2015). Journal of Financial Stability, Vol. 25, 2016, Available at SSRN: https://ssrn.com/abstract=2213509 or http://dx.doi.org/10.2139/ssrn.2213509

Luiz F. F. Felix

APG Asset Management ( email )

Gustav Mahlerplein 3
Amsterdam, 1082 MS
Netherlands

Roman Kraeussl

Luxembourg School of Finance ( email )

4, rue Albert Borschette
Luxembourg, 1246
Luxembourg
+3524666445442 (Phone)

HOME PAGE: http://www.art-finance.com

Hoover Institution, Stanford University ( email )

Stanford, CA 94305
United States

Philip A. Stork (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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