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The price effect of temporary short-selling bans: Theory and evidence

Author

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  • Tian, Haoshu
  • Yan, Xuemin (Sterling)
  • Zheng, Lingling

Abstract

We develop a model of temporary short-selling bans by extending the infinite-horizon model of Scheinkman and Xiong (2003). Our model predicts that a temporary short-selling ban leads to a speculative bubble that is the highest at the beginning of the ban and gradually converges to zero. Examining the 2008 short-selling ban in the U.S., we find evidence consistent with the model’s predictions. The innovation of our empirical design is to use the financial segments of non-banned stocks as a control group for the banned financial stocks. Our results are robust across different test specifications and different samples of stocks.

Suggested Citation

  • Tian, Haoshu & Yan, Xuemin (Sterling) & Zheng, Lingling, 2024. "The price effect of temporary short-selling bans: Theory and evidence," Journal of Financial Markets, Elsevier, vol. 69(C).
    • Handle: RePEc:eee:finmar:v:69:y:2024:i:c:s1386418124000089
    DOI: 10.1016/j.finmar.2024.100890
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    More about this item

    Keywords

    Speculative bubble; Short-selling ban;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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

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