IDEAS home Printed from https://ideas.repec.org/p/sef/csefwp/423.html
   My bibliography  Save this paper

Short-Selling Bans and Bank Stability

Author

Abstract

In both the subprime crisis and the eurozone crisis, regulators imposed bans on short sales, aimed mainly at preventing stock price turbulence from destabilizing financial institutions. Contrary to the regulators’ intentions, financial institutions whose stocks were banned experienced greater increases in the probability of default and volatility than unbanned ones, and these increases were larger for more vulnerable financial institutions. To take into account the endogeneity of short sales bans, we match banned financial institutions with unbanned ones of similar size and riskiness, and instrument the 2011 ban decisions with regulators’ propensity to impose a ban in the 2008 crisis.

Suggested Citation

  • Alessandro Beber & Daniela Fabbri & Marco Pagano & Saverio Simonelli, 2015. "Short-Selling Bans and Bank Stability," CSEF Working Papers 423, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 25 Sep 2020.
    • Handle: RePEc:sef:csefwp:423
    as

    Download full text from publisher

    File URL: http://www.csef.it/WP/wp423.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Duffie, Darrell & Saita, Leandro & Wang, Ke, 2007. "Multi-period corporate default prediction with stochastic covariates," Journal of Financial Economics, Elsevier, vol. 83(3), pages 635-665, March.
    2. Xuewen Liu, 2015. "Short-Selling Attacks and Creditor Runs," Management Science, INFORMS, vol. 61(4), pages 814-830, April.
    3. Carlo Altavilla & Marco Pagano & Saverio Simonelli, 2017. "Bank Exposures and Sovereign Stress Transmission," Review of Finance, European Finance Association, vol. 21(6), pages 2103-2139.
    4. Harrison Hong & Jeremy C. Stein, 2003. "Differences of Opinion, Short-Sales Constraints, and Market Crashes," The Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 487-525.
    5. Emmanuel Farhi & Jean Tirole, 2018. "Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(3), pages 1781-1823.
    6. Alessandro Beber & Marco Pagano, 2013. "Short-Selling Bans Around the World: Evidence from the 2007–09 Crisis," Journal of Finance, American Finance Association, vol. 68(1), pages 343-381, February.
    7. Marsh, Ian W. & Payne, Richard, 2012. "Banning short sales and market quality: The UK’s experience," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1975-1986.
    8. Duan, Jin-Chuan & Sun, Jie & Wang, Tao, 2012. "Multiperiod corporate default prediction—A forward intensity approach," Journal of Econometrics, Elsevier, vol. 170(1), pages 191-209.
    9. Andrews,Donald W. K. & Stock,James H. (ed.), 2005. "Identification and Inference for Econometric Models," Cambridge Books, Cambridge University Press, number 9780521844413, September.
    10. Markus K. Brunnermeier & Martin Oehmke, 2014. "Predatory Short Selling," Review of Finance, European Finance Association, vol. 18(6), pages 2153-2195.
    11. Iacus, Stefano M. & King, Gary & Porro, Giuseppe, 2011. "Multivariate Matching Methods That Are Monotonic Imbalance Bounding," Journal of the American Statistical Association, American Statistical Association, vol. 106(493), pages 345-361.
    12. Russell Cooper & Kalin Nikolov, 2018. "Government Debt And Banking Fragility: The Spreading Of Strategic Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(4), pages 1905-1925, November.
    13. Kewei Hou & G. Andrew Karolyi & Bong-Chan Kho, 2011. "What Factors Drive Global Stock Returns?," The Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2527-2574.
    14. Viral Acharya & Itamar Drechsler & Philipp Schnabl, 2014. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," Journal of Finance, American Finance Association, vol. 69(6), pages 2689-2739, December.
    15. Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
    16. Ekkehart Boehmer & Charles M. Jones & Xiaoyan Zhang, 2013. "Shackling Short Sellers: The 2008 Shorting Ban," The Review of Financial Studies, Society for Financial Studies, vol. 26(6), pages 1363-1400.
    17. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. "On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
    18. Viral Acharya & Robert Engle & Matthew Richardson, 2012. "Capital Shortfall: A New Approach to Ranking and Regulating Systemic Risks," American Economic Review, American Economic Association, vol. 102(3), pages 59-64, May.
    19. Robert Battalio & Hamid Mehran & T. Paul Schultz, 2011. "Market declines: Is banning short selling the solution?," Staff Reports 518, Federal Reserve Bank of New York.
    20. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-1168, September.
    21. Vivian W. Fang & Allen H. Huang & Jonathan M. Karpoff, 2016. "Short Selling and Earnings Management: A Controlled Experiment," Journal of Finance, American Finance Association, vol. 71(3), pages 1251-1294, June.
    22. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2003. "Modeling and Forecasting Realized Volatility," Econometrica, Econometric Society, vol. 71(2), pages 579-625, March.
    23. Leonello, Agnese, 2018. "Government guarantees and the two-way feedback between banking and sovereign debt crises," Journal of Financial Economics, Elsevier, vol. 130(3), pages 592-619.
    24. Lando, David & Nielsen, Mads Stenbo, 2010. "Correlation in corporate defaults: Contagion or conditional independence?," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 355-372, July.
    25. Félix, Luiz & Kräussl, Roman & Stork, Philip, 2016. "The 2011 European short sale ban: A cure or a curse?," Journal of Financial Stability, Elsevier, vol. 25(C), pages 115-131.
    26. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
    27. Robert Battalio & Paul Schultz, 2011. "Regulatory Uncertainty and Market Liquidity: The 2008 Short Sale Ban's Impact on Equity Option Markets," Journal of Finance, American Finance Association, vol. 66(6), pages 2013-2053, December.
    28. Massimo Massa & Bohui Zhang & Hong Zhang, 2015. "The Invisible Hand of Short Selling: Does Short Selling Discipline Earnings Management?," The Review of Financial Studies, Society for Financial Studies, vol. 28(6), pages 1701-1736.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Srivastava, Jagriti & Gopalakrishnan, Balagopal, 2021. "In-kind financing during a pandemic: Trade credit and COVID-19," MPRA Paper 111433, University Library of Munich, Germany, revised Dec 2021.
    2. 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.
    3. Bessler, Wolfgang & Vendrasco, Marco, 2021. "The 2020 European short-selling ban and the effects on market quality," Finance Research Letters, Elsevier, vol. 42(C).
    4. Luu, Ellie & Xu, Fangming & Zheng, Liyi, 2023. "Short-selling activities in the time of COVID-19," The British Accounting Review, Elsevier, vol. 55(4).
    5. Mark S. Carey & Christopher Healy, 2024. "Short Selling and Bank Deposit Flows," Working Papers 24-05, Federal Reserve Bank of Cleveland.
    6. 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).
    7. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jing Chen & David G. McMillan & Mike Buckle, 2018. "Information Transmission across European Equity Markets During Crisis Periods," Manchester School, University of Manchester, vol. 86(6), pages 770-788, December.
    2. 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).
    3. Jank, Stephan & Roling, Christoph & Smajlbegovic, Esad, 2021. "Flying under the radar: The effects of short-sale disclosure rules on investor behavior and stock prices," Journal of Financial Economics, Elsevier, vol. 139(1), pages 209-233.
    4. Bui, Dien Giau & Hasan, Iftekhar & Lin, Chih-Yung & Nguyen, Hong Thoa, 2023. "Short-selling threats and bank risk-taking: Evidence from the financial crisis," Journal of Banking & Finance, Elsevier, vol. 150(C).
    5. He, Meng & Bai, Xuelian & Zhang, Junrui, 2024. "Does short selling reduce classification shifting?—— Exploration of market-oriented governance mechanism," International Review of Financial Analysis, Elsevier, vol. 93(C).
    6. Bessler, Wolfgang & Vendrasco, Marco, 2021. "The 2020 European short-selling ban and the effects on market quality," Finance Research Letters, Elsevier, vol. 42(C).
    7. Eom, Yunsung & Hahn, Jaehoon & Sohn, Wook, 2021. "Short sales restrictions and market quality: Evidence from Korea," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    8. Alves, Carlos & Mendes, Victor & Silva, Paulo Pereira da, 2016. "Analysis of market quality before and during short-selling bans," Research in International Business and Finance, Elsevier, vol. 37(C), pages 252-268.
    9. Luo, Jinbo & Ni, Xiaoran & Tian, Gary Gang, 2020. "Short selling and corporate tax avoidance: Insights from a financial constraint view," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    10. Juwon Jang & Eunju Lee, 2024. "CEO confidence matters: the real effects of short sale constraints revisited," Review of Quantitative Finance and Accounting, Springer, vol. 62(2), pages 603-636, February.
    11. Óscar Arce & Sergio Mayordomo, 2014. "Short-sale constraints and financial stability: Evidence from the Spanish market," Working Papers 1410, Banco de España.
    12. Lensberg, Terje & Schenk-Hoppé, Klaus Reiner & Ladley, Dan, 2015. "Costs and benefits of financial regulation: Short-selling bans and transaction taxes," Journal of Banking & Finance, Elsevier, vol. 51(C), pages 103-118.
    13. Nezafat, Mahdi & Schroder, Mark & Wang, Qinghai, 2017. "Short-sale constraints, information acquisition, and asset prices," Journal of Economic Theory, Elsevier, vol. 172(C), pages 273-312.
    14. Siu Kai Choy & Hua Zhang, 2019. "Public news announcements, short-sale restriction and informational efficiency," Review of Quantitative Finance and Accounting, Springer, vol. 52(1), pages 197-229, January.
    15. Wang, Yuchen & Wang, Xiaoming, 2023. "Economic policy uncertainty and information intermediary: The case of short seller," Economic Modelling, Elsevier, vol. 120(C).
    16. Khan, Mostafa Saidur Rahim & Kato, Hideaki Kiyoshi & Bremer, Marc, 2019. "Short sales constraints and stock returns: How do the regulations fare?," Journal of the Japanese and International Economies, Elsevier, vol. 54(C).
    17. 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.
    18. 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).
    19. Larry Su & Elmina Homapour & Francisco Chiclana, 2022. "Short-Sale Constraints and Stock Prices: Evidence from Implementation of Securities Refinancing Mechanism in Chinese Stock Markets," Mathematics, MDPI, vol. 10(17), pages 1-21, September.
    20. Marco Valerio Geraci & Tomas Garbaravicius & David Veredas, 2016. "Short Selling in the Tails," Working Papers ECARES ECARES 2016-30, ULB -- Universite Libre de Bruxelles.

    More about this item

    Keywords

    short selling; ban; financial crisis; bank stability; systemic risk;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sef:csefwp:423. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dr. Maria Carannante (email available below). General contact details of provider: https://edirc.repec.org/data/cssalit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.