Which Short-Selling Regulation is the Least Damaging to Market Efficiency? Evidence from Europe
Posted: 31 Jan 2014
Date Written: January 2014
Exploiting cross-sectional and time-series variations in European regulations during the July 2008 – June 2009 period, we show that: 1) Prohibition on covered short selling raises bid-ask spread and reduces trading volume, 2) Prohibition on naked short selling raises both volatility and bid-ask spread, 3) Disclosure requirements raise volatility and reduce trading volume, and 4) No regulation is effective against price decline. Overall, all short-sale regulations harm market efficiency. However, naked short-selling prohibition is the only regulation that leaves volumes unchanged while addressing the failure to deliver. Therefore, we argue that this is the least damaging to market efficiency.
Keywords: Short selling, disclosure requirement, market efficiency, regulation, volatility
JEL Classification: G18, G14, G01, K20, O52
Suggested Citation: Suggested Citation