The 2008 Short-Selling Ban's Impact on Tail Risk

Abstract

We examine how the 2008 U.S. short-selling ban on the stocks of financial institutions impacted their equity tail risk. Using propensity score matching and difference-in-difference regressions, we show that the ban was not effective in restoring financial stability as measured by the stocks’ dynamic Marginal Expected Shortfall. In contrast, especially large institutions, those who were most vulnerable to market downturns in the preban period, as well as those equities with associated put option contracts, experienced sharp increases in their exposure to market downturns during the ban period, contrary to regulators’ intentions.

Keywords: Short-selling ban, tail risk, financial stability, financial crisis