Short-Selling, Leverage, and Systemic Risk

39 Pages Posted: 5 Nov 2013

See all articles by Amelia Pais

Amelia Pais

Massey University - Department of Commerce

Philip A. Stork

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

Date Written: November 5, 2013

Abstract

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

Pais, Amelia and Stork, Philip A., Short-Selling, Leverage, and Systemic Risk (November 5, 2013). Available at SSRN: https://ssrn.com/abstract=2350125 or http://dx.doi.org/10.2139/ssrn.2350125

Amelia Pais

Massey University - Department of Commerce ( email )

Private Bag 102-904
Auckland
New Zealand

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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