Which Financial Stocks Did Short Sellers Target in the Subprime Crisis?

58 Pages Posted: 4 Mar 2015

See all articles by Iftekhar Hasan

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Nadia Massoud

Melbourne Business School, University of Melbourne

Anthony Saunders

New York University - Leonard N. Stern School of Business

Keke Song

Melbourne Business School, the University of Melbourne

Date Written: February 13, 2015

Abstract

​Tracing the SEC ban on the short selling of financial stocks in September 2008, this paper investigates whether such selling activity before the 2008 short ban reflected financial companies’ risk exposures in the subprime crisis. The evidence suggests that short sellers sold short stocks that had the greatest asset and insolvency risk exposures, and that the short selling of financial firms’ stocks was not significantly greater than that of non-financial firms. When the short ban was in effect, the market quality of financial stocks without subprime asset exposure had deteriorated to a larger degree than that of financial companies with subprime asset exposure. The findings imply that such a regulation may mute the market disciplining effects of investors and may also serve as a counterweight to any perceived macro or systemic risk reduction benefits resulting from such a ban.

Keywords: short selling, subprime assets, financial crisis, short-sale ban, CDS spread

JEL Classification: G01, G14, G18, G28, G33

Suggested Citation

Hasan, Iftekhar and Massoud, Nadia and Saunders, Anthony and Song, Keke, Which Financial Stocks Did Short Sellers Target in the Subprime Crisis? (February 13, 2015). Journal of Banking and Finance, Vol. 54, 2015, Bank of Finland Research Discussion Paper No. 3/2015, Available at SSRN: https://ssrn.com/abstract=2570847 or http://dx.doi.org/10.2139/ssrn.2570847

Iftekhar Hasan (Contact Author)

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Nadia Massoud

Melbourne Business School, University of Melbourne ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia
+61 3 9349 8130 (Phone)
+61 3 9349 8136 (Fax)

HOME PAGE: http://mbs.edu/facultyresearch/facultydirectory/Pages/NadiaMassoud.aspx

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Keke Song

Melbourne Business School, the University of Melbourne ( email )

200 Leicester Steet
Carlton, 3053
Australia

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