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2008 SEC short selling ban: impacts on the credit default swap market

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  • Courtney, Samuel

Abstract

On September 17, 2008, the Securities and Exchange Commission (SEC) issued an emergency order banning the shorting of 797 financial stocks. This paper studies the impact of the short selling ban on the credit derivatives market by investigating credit default swap (CDS) prices during the period that the ban was in effect. The hypothesis is proposed that the short selling ban on 797 financial stocks led market participants to enter CDS contracts to reflect positions that the participants had formerly entered through short sales, thus driving up CDS rates. Analysis compares the CDS prices of firms protected by the ban to the CDS prices of similar firms in the S&P 500 not covered by the ban. Tests are also conducted using metrics from the bond and equities markets to determine if the results from the CDS market are unique to the CDS space. A linear regression technique is used to test the significance of the ban on CDS prices. The study results indicate that the CDS prices of firms covered by the short selling restrictions experienced significant dislocations during the period of the ban.

Suggested Citation

  • Courtney, Samuel, 2010. "2008 SEC short selling ban: impacts on the credit default swap market," MPRA Paper 35366, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:35366
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    File URL: https://mpra.ub.uni-muenchen.de/35366/1/MPRA_paper_35366.pdf
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    References listed on IDEAS

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    1. Jeffery D Amato, 2005. "Risk aversion and risk premia in the CDS market," BIS Quarterly Review, Bank for International Settlements, December.
    2. Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November.
    3. Fathi Abid & Nader Naifar, 2006. "The Determinants Of Credit Default Swap Rates: An Explanatory Study," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(01), pages 23-42.
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    Cited by:

    1. Paulo Pereira da Silva, 2016. "Did Investors Seeking Short Exposure Move to the CDS Market after the 2011 Short-Sale Bans in European Financial Stocks?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(4), pages 322-353, August.

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    More about this item

    Keywords

    SEC short selling ban; credit default swaps; credit derivatives;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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