Price Inflation and Wealth Transfer During the 2008 SEC Short-Sale Ban

Journal Of Investment Management (JOIM), Second Quarter 2013

Posted: 15 Jun 2013

See all articles by Lawrence Harris

Lawrence Harris

University of Southern California - Marshall School of Business - Finance and Business Economics Department; Institute for Quantitative Research in Finance (the Q-Group); Interactive Brokers, Inc. (IBKR); University of Pennsylvania - Financial Economists Roundtable

Ethan Namvar

University of California, Berkeley - Haas School of Business; Columbia Business School

Blake Phillips

University of Waterloo

Multiple version iconThere are 2 versions of this paper

Date Written: June 14, 2013

Abstract

We estimate that the ban on short-selling financial stocks imposed by the SEC in September 2008 led to price inflation of 10-12% in the banned stocks based on a factor-analytic model that extracts common valuation information from the prices of stocks that were not banned. This inflation reversed approximately two weeks after the ban for stocks with negative pre-ban performance. In contrast, similar magnitude price inflation was sustained following the ban for stocks with positive pre-ban performance, suggesting the ban was successful in stabilizing prices for these stocks. Cross-sectional analysis reveals that inflation was isolated to stocks without traded options, suggesting option markets provided a mechanism for traders to circumnavigate the ban. Further, we find that the level and change in short interest associated with the ban is unrelated to the level of inflation. These results suggest that price pressure associated with closing short positions at the start of the ban is unrelated to the noted price inflation. If prices were inflated, buyers paid more than they otherwise would have for the banned stocks during the period of the ban. We provide a conservative estimate of $2.3 to $4.9 billion for the resulting wealth transfer from buyers to sellers, depending on how post-ban reversal evidence is interpreted. Such transfers should interest policymakers concerned with maintaining fair markets.

Keywords: Short selling, short-sale ban, short-sale constraints, financial crisis

JEL Classification: G00

Suggested Citation

Harris, Lawrence and Namvar, Ethan and Phillips, Blake, Price Inflation and Wealth Transfer During the 2008 SEC Short-Sale Ban (June 14, 2013). Journal Of Investment Management (JOIM), Second Quarter 2013. Available at SSRN: https://ssrn.com/abstract=2279603

Lawrence Harris (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6496 (Phone)
213-740-6650 (Fax)

Institute for Quantitative Research in Finance (the Q-Group) ( email )

Q Group
P.O. Box 1540
Valley Stream, NY 11582
United States

Interactive Brokers, Inc. (IBKR) ( email )

209 South LaSalle Street
10th Floor
Chicago, IL 60604
United States

University of Pennsylvania - Financial Economists Roundtable ( email )

Philadelphia, PA
United States

Ethan Namvar

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-7989 (Phone)

HOME PAGE: http://haas.berkeley.edu

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Blake Phillips

University of Waterloo ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

Register to save articles to
your library

Register

Paper statistics

Abstract Views
451
PlumX Metrics