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Which short-selling regulation is the least damaging to market efficiency? Evidence from Europe

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  • Bernal, Oscar
  • Herinckx, Astrid
  • Szafarz, Ariane

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 harm 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.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Law and Economics.

Volume (Year): 37 (2014)
Issue (Month): C ()
Pages: 244-256

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Handle: RePEc:eee:irlaec:v:37:y:2014:i:c:p:244-256

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Web page: http://www.elsevier.com/locate/irle

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Keywords: Short selling; Disclosure requirement; Market efficiency; Regulation; Volatility;

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