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The 2020 European short-selling ban and the effects on market quality

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  • Bessler, Wolfgang
  • Vendrasco, Marco

Abstract

Responding to the dramatic price declines during the Covid-19 pandemic, six European countries introduced short-selling bans in March 2020. We analyze how these restrictions affected the market quality by comparing countries with and without bans. We observe for ban countries relatively lower market liquidity, lower trading volume, and wider bid-ask spreads. Moreover, regulators’ aim to prevent price declines and reduce volatility failed, as ban and no-ban countries reveal no differences and prices increased. Our results clearly detail the negative market-quality effects resulting from restrictions, especially for smaller markets and firms. Consequently, this regulatory interference did not protect but harmed investors.

Suggested Citation

  • Bessler, Wolfgang & Vendrasco, Marco, 2021. "The 2020 European short-selling ban and the effects on market quality," Finance Research Letters, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:finlet:v:42:y:2021:i:c:s1544612320317001
    DOI: 10.1016/j.frl.2020.101886
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    Cited by:

    1. Zhuwei Li & Xuejiao Lu & Yuan Fu, 2022. "Interaction influence of trading rules on the quality of stock markets: the price limit rule and day trading rule from the Shanghai and Shenzhen Stock exchanges," Applied Economics, Taylor & Francis Journals, vol. 54(56), pages 6467-6479, December.
    2. Bessler, Wolfgang & Beyenbach, Johannes & Rapp, Marc Steffen & Vendrasco, Marco, 2021. "The global financial crisis and stock market migrations: An analysis of family and non-family firms in Germany," International Review of Financial Analysis, Elsevier, vol. 74(C).
    3. Shiqi Gong & Shuaiqiang Liu & Danny D. Sun, 2023. "Optimal Market Making in the Chinese Stock Market: A Stochastic Control and Scenario Analysis," Papers 2306.02764, arXiv.org.
    4. Bessler, Wolfgang & Vendrasco, Marco, 2022. "Why do companies become hedge fund targets? Evidence from shareholder activism in Germany," Finance Research Letters, Elsevier, vol. 47(PB).
    5. Bessler, Wolfgang & Vendrasco, Marco, 2022. "Short-selling restrictions and financial stability in Europe: Evidence from the Covid-19 crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
    6. Fohlin, Caroline & Lu, Zhikun & Zhou, Nan, 2022. "Short sale bans may improve market quality during crises: New evidence from the 2020 Covid," SAFE Working Paper Series 365, Leibniz Institute for Financial Research SAFE.

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    More about this item

    Keywords

    Short-selling ban; Covid-19; Market quality measures; Liquidity; Volatility; Trading volume;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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