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Do short selling restrictions destabilize stock markets? Lessons from Taiwan

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  • Bohl, Martin T.
  • Essid, Badye
  • Siklos, Pierre L.

Abstract

Short sellers have been routinely blamed for triggering, or exacerbating, stock market declines. The experience of Taiwan provides an interesting case study of the impact of short selling bans on stock returns volatility in a time series framework due to the length of time the short selling ban was in place there. Estimating several variants of an asymmetric GARCH model and a Markov switching GARCH model we find robust evidence that short selling restrictions raise stock returns volatility. The only qualifier is that the impact of short sale bans is a feature of the expansionary phase of business cycles. During recessions this effect dissipates.

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  • Bohl, Martin T. & Essid, Badye & Siklos, Pierre L., 2012. "Do short selling restrictions destabilize stock markets? Lessons from Taiwan," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(2), pages 198-206.
    • Handle: RePEc:eee:quaeco:v:52:y:2012:i:2:p:198-206
    DOI: 10.1016/j.qref.2012.02.001
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    Cited by:

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    2. Nathalie Oriol & Iryna Veryzhenko, 2015. "Market structure or traders’ behavior? An assessment of flash crash phenomena and their regulation based on a multi-agent simulation," Working Papers halshs-01254435, HAL.
    3. Abhinava Tripathi, 2021. "The Arrival of Information and Price Adjustment Across Extreme Quantiles: Global Evidence," IIM Kozhikode Society & Management Review, , vol. 10(1), pages 7-19, January.
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    5. Bohl, Martin T. & Reher, Gerrit & Wilfling, Bernd, 2016. "Short selling constraints and stock returns volatility: Empirical evidence from the German stock market," Economic Modelling, Elsevier, vol. 58(C), pages 159-166.
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    7. Swastika, Putri & Dewandaru, Ginanjar & Masih, Mansur, 2013. "Does Restricted Short Selling Bring Benefit to Stocks Listed in Islamic Capital Market? New Evidence from Malaysia based on Dynamic Panel Heterogeneous Techniques," MPRA Paper 58833, University Library of Munich, Germany.
    8. Nathalie Oriol & Iryna Veryzhenko, 2019. "Market structure or traders' behavior? A multi agent model to assess flash crash phenomena and their regulation," Quantitative Finance, Taylor & Francis Journals, vol. 19(7), pages 1075-1092, July.
    9. Blau, Benjamin M. & Smith, Jason M., 2014. "Autocorrelation in daily short-sale volume," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(1), pages 31-41.

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    More about this item

    Keywords

    Short-selling bans; Taiwanese stock market; Asymmetric GARCH models; Markov switching models;
    All these keywords.

    JEL classification:

    • 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

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