Which Short-Selling Regulation is the Least Damaging to Market Efficiency? Evidence from Europe

Posted: 31 Jan 2014

See all articles by Oscar Bernal

Oscar Bernal

University of Namur

Astrid Herinckx

Université Libre de Bruxelles (ULB)

Ariane Szafarz

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi

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Date Written: January 2014

Abstract

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

Bernal, Oscar and Herinckx, Astrid and Szafarz, Ariane, Which Short-Selling Regulation is the Least Damaging to Market Efficiency? Evidence from Europe (January 2014). International Review of Law and Economics, Vol. 37, 244-256, 2014. Available at SSRN: https://ssrn.com/abstract=2387612

Oscar Bernal

University of Namur ( email )

8 rempart de la vierge
Namur, 5000
Belgium

Astrid Herinckx

Université Libre de Bruxelles (ULB) ( email )

CP 132 Av FD Roosevelt 50
Brussels, Brussels 1050
Belgium

Ariane Szafarz (Contact Author)

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi ( email )

50 Avenue Roosevelt
Brussels 1050
Belgium

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