What Does Academic Research Say about Short-Selling Bans?

WFE Research Working Papers, World Federation of Exchanges

15 Pages Posted: 2 Feb 2021

See all articles by Stefano Alderighi

Stefano Alderighi

Financial Reporting Council - UKEB

Pedro Gurrola-Perez

World Federation of Exchanges

Date Written: April 29, 2020


As a reaction to higher market volatility due to the global COVID-19 pandemic, in March 2020 some financial regulators imposed short-selling bans on equity markets. Their argument is that short-selling exacerbates downward price movements, thus being responsible for heightened volatility and reduced market confidence. This paper reviews the academic literature on short-selling and short-selling bans, comparing the arguments against banning short-selling with the arguments in favour. We find that the evidence almost unanimously points towards short-selling bans being disruptive for the orderly functioning of markets, as they are found to reduce liquidity, increase price inefficiency and hamper price discovery. In addition, short-selling bans are found to have negative spillover effects on other markets, for example option markets. According to the literature, during periods of price decline and heightened volatility, short-sellers do not behave differently from any other traders, and contribute less to price declines than regular ‘long’ sellers. As research has shown that short-selling bans are more deleterious to markets characterized by a relatively high amount of small stocks, low levels of fragmentation, and fewer alternatives to short-selling, emerging markets should be particularly wary of bans on short-selling.

Keywords: Short-selling bans, Liquidity, Price discovery

JEL Classification: G14, G18

Suggested Citation

Alderighi, Stefano and Gurrola Perez, Pedro, What Does Academic Research Say about Short-Selling Bans? (April 29, 2020). WFE Research Working Papers, World Federation of Exchanges, Available at SSRN: https://ssrn.com/abstract=3775704 or http://dx.doi.org/10.2139/ssrn.3775704

Stefano Alderighi

Financial Reporting Council - UKEB ( email )

125 London Wall
Financial Reporting Council
London, L EC2Y 5AS
United Kingdom

Pedro Gurrola Perez (Contact Author)

World Federation of Exchanges ( email )

125 Old Broad Street
London, EC2N 1AR
United Kingdom
EC2N 1AR (Fax)

HOME PAGE: http://www.world-exchanges.org

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