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The 2011 European Short Sale Ban: An Option Market Perspective

Author

Listed:
  • Roman Kräussl
  • Luiz Félix
  • Philip Stork

    (LSF)

Abstract

We examine how the 2011 European short sale ban affected jump risk and contagion risk of both banned and unbanned stocks. Using Extreme Value Theory, we estimate the tails of stock options’ risk-neutral densities to calculate extreme downside risk. Using this measure and implied volatility skews, we find that on ban announcement day jump risk abruptly rose for all stocks and subsequently remained elevated, impacting especially banned stocks. We show that it is the imposition of the ban itself that led to the increase in jump risk rather than other causes such as information flow, options trading volumes, or stock specific factors. We document that contagion risk decreased for banned stocks after imposition of the ban, while it increased for unbanned stocks. Substitution effects were minimal, as both banned stocks’ put trading volumes and put-call ratios declined during the ban. We argue that the ban curbed further selling pressure and decreased contagion risk in financial stocks, by redirecting trading activity towards index options. "Keywords:Short sale ban; jump risk; risk-neutral density; implied volatility skew; contagion risk"

Suggested Citation

  • Roman Kräussl & Luiz Félix & Philip Stork, 2014. "The 2011 European Short Sale Ban: An Option Market Perspective," LSF Research Working Paper Series 14-02, Luxembourg School of Finance, University of Luxembourg.
    • Handle: RePEc:crf:wpaper:14-02
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    Cited by:

    1. Previati, Daniele Angelo & Galloppo, Giuseppe & Aliano, Mauro & Paimanova, Viktoria, 2021. "Why do banks react differently to short-selling bans? Evidence from the Asia-Pacific area and the United States," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 144-158.
    2. Guagliano, Claudia & Mazzacurati, Julien, 2017. "Collateral scarcity premia in euro area repo markets," ESRB Working Paper Series 55, European Systemic Risk Board.
    3. Daniele Angelo Previati & Giuseppe Galloppo & Mauro Aliano & Viktoriia Paimanova, 2017. "Why Do US Banks React Differently to Short Selling Bans?," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Giusy Chesini & Elisa Giaretta & Andrea Paltrinieri (ed.), The Business of Banking, chapter 0, pages 79-108, Palgrave Macmillan.

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    More about this item

    Keywords

    short sale ban; jump risk; risk-neutral density; implied volatility skew; contagion risk";
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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