Short-Selling, Leverage, and Systemic Risk
39 Pages Posted: 5 Nov 2013
Date Written: November 5, 2013
During the Global Financial Crisis, regulators imposed short-selling bans to protect financial institutions. The rationale behind the bans was that ‘bear raids’, driven by short-sellers, would increase the individual and systemic risk of financial institutions, especially for institutions with high leverage. This study uses Extreme Value Theory to estimate the effect of short-selling on financial institutions’ individual and systemic risks in France, Italy and Spain; it also analyses the relationship between financial institutions’ leverage and short-selling. The results show that short-sellers appear to specifically target institutions with lower capital levels. Furthermore, institutions’ risk-levels and changes in short-selling positions tend to move in tandem.
Keywords: bear raids, short-selling bans, financial institutions’ risk, systemic risk, leverage capital requirements, Extreme Value Theory
JEL Classification: C14; G01; G15; G21
Suggested Citation: Suggested Citation