Short Sale Bans May Improve Market Quality During Crises: New Evidence from the 2020 Covid Crash

20 Pages Posted: 12 Aug 2022 Last revised: 30 Nov 2022

See all articles by Caroline Fohlin

Caroline Fohlin

Emory University; Centre for Economic Policy Research (CEPR)

Zhikun Lu

Emory University - Goizueta Business School

Nan Zhou

Johns Hopkins University, Advanced Academic Programs

Multiple version iconThere are 2 versions of this paper

Date Written: September 7, 2022

Abstract

In theory, banning short selling stabilizes stock prices but undermines pricing efficiency and has ambiguous impacts on market liquidity. Empirical studies find mixed and conflicting results. This paper leverages cross-country policy variation during the 2020 Covid crisis to assess differential impacts of bans on stock liquidity, prices, and volatility. Results suggest that bans improved liquidity and stabilized prices for illiquid stocks but temporarily diminished liquidity for highly liquid stocks. The findings support theories in which short sale bans may improve liquidity by selectively filtering out informed—potentially predatory—traders. Thus, policies that target the most illiquid stocks may deliver better overall market quality than uniform short sale bans imposed on all stocks.

Keywords: short sale ban, liquidity, market microstructure

JEL Classification: G01, G14, G18

Suggested Citation

Fohlin, Caroline and Lu, Zhikun and Zhou, Nan, Short Sale Bans May Improve Market Quality During Crises: New Evidence from the 2020 Covid Crash (September 7, 2022). Available at SSRN: https://ssrn.com/abstract=4187052 or http://dx.doi.org/10.2139/ssrn.4187052

Caroline Fohlin

Emory University ( email )

Dept. of Economics
Atlanta, GA Georgia 30322
United States
4047276363 (Phone)

HOME PAGE: http://https://scholar.google.com/citations?user=Ma08bxEAAAAJ&hl=en

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Zhikun Lu

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Nan Zhou (Contact Author)

Johns Hopkins University, Advanced Academic Programs ( email )

Baltimore, MD 20036-1984
United States
202-452-0780 (Phone)

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