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Which Short-Selling Regulation is the Least Damaging to Market Efficiency? Evidence from Europe

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  • Astrid Herinckx
  • Ariane Szafarz

Abstract

Exploiting cross-sectional and time-series variations in European regulations during the July 2008 – June 2009 period, we show that: 1) Prohibition on covered short selling raises bid-ask spread and reduces trading volume, 2) Prohibition on naked short selling raises both volatility and bid-ask spread, 3) Disclosure requirements raise volatility and reduce trading volume, and 4) No regulation is effective against price decline. Overall, all short-sale regulations are detrimental to market efficiency. However, naked short-selling prohibition is the only regulation that leaves volumes unchanged while addressing the failure to deliver. Therefore, we argue that this is the least damaging to market efficiency.

Suggested Citation

  • Astrid Herinckx & Ariane Szafarz, 2012. "Which Short-Selling Regulation is the Least Damaging to Market Efficiency? Evidence from Europe," Working Papers CEB 12-002, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:sol:wpaper:2013/107635
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    Citations

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    Cited by:

    1. Ariane Szafarz, 2015. "Market Efficiency and Crises:Don’t Throw the Baby out with the Bathwater," Bankers, Markets & Investors, ESKA Publishing, issue 139, pages 20-26, November-.
    2. Marie Briere & Ariane Szafarz, 2015. "Factor-Based v. Industry-Based Asset Allocation: The Contest," Working Papers CEB 15-035, ULB -- Universite Libre de Bruxelles.
    3. Martin T. Bohl & Badye Essid & Pierre L. Siklos, 2018. "Short-Selling Bans and the Global Financial Crisis: Are They Interconnected?," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot GmbH, Berlin, vol. 64(2), pages 159-177.
    4. Marco Valerio Geraci & Tomas Garbaravicius & David Veredas, 2016. "Short Selling in the Tails," Working Papers ECARES ECARES 2016-30, ULB -- Universite Libre de Bruxelles.
    5. Marie Briere & Ariane Szafarz, 2017. "Factor Investing: The Rocky Road from Long-Only to Long-Short," Working Papers CEB 17-013, ULB -- Universite Libre de Bruxelles.
    6. Marie Brière & Ariane Szafarz, 2021. "When it rains, it pours: Multifactor asset management in good and bad times," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(3), pages 641-669, September.
    7. Geraci, Marco Valerio & Garbaravičius, Tomas & Veredas, David, 2018. "Short selling in extreme events," Journal of Financial Stability, Elsevier, vol. 39(C), pages 90-103.

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    More about this item

    Keywords

    short selling; disclosure requirement; market efficiency; regulation; volatility;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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