Short Selling Equity Exchange Traded Funds and its Effect on Stock Market Liquidity

The Journal of Financial and Quantitative Analysis

60 Pages Posted: 22 Jan 2017 Last revised: 20 Oct 2020

See all articles by Egle Karmaziene

Egle Karmaziene

VU University Amsterdam; Swedish House of Finance

Valeri Sokolovski

HEC Montreal - Department of Finance

Date Written: October 14, 2020

Abstract

We examine short selling of equity exchange traded funds (ETFs) using the 2008 short-sale ban. Contrasting the previously documented contractions in bearish strategies during the ban, we find a significant increase in short sales of the largest, most liquid ETF, the S&P 500 Spider. We offer evidence suggesting this upsurge was driven primarily by investors circumventing the ban. We show that the ban’s detrimental effect on stock liquidity was around 30% less severe for the Spider’s constituents. Our results suggest that ETF shorts can substitute for short sales of individual stocks, thereby alleviating short-sale constraints’ adverse effect on liquidity.

Keywords: Exchange traded funds, ETFs, financial crisis, liquidity, regulation, SEC, short-sale ban.

JEL Classification: G14, G18, G28

Suggested Citation

Karmaziene, Egle and Sokolovski, Valeri, Short Selling Equity Exchange Traded Funds and its Effect on Stock Market Liquidity (October 14, 2020). The Journal of Financial and Quantitative Analysis, Available at SSRN: https://ssrn.com/abstract=2901916 or http://dx.doi.org/10.2139/ssrn.2901916

Egle Karmaziene (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Swedish House of Finance ( email )

Drottninggatan 98
Stockholm, 111 60
Sweden

Valeri Sokolovski

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

HOME PAGE: http://www.hec.ca/en/profs/valeri.sokolovski.html

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
428
Abstract Views
2,741
Rank
103,639
PlumX Metrics