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Short Selling: A known unknown

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  • Cinquegrana, Piero

Abstract

Short selling is a technique that allows profiting from falling stock prices. In the autumn of 2008 several countries implemented a partial or complete ban on short selling. In this new commentary, Piero Cinquegrana, Associate Research Fellow at ECMI, reviews those decisions and attempts to answer three questions: 1) Is short selling legitimate? 2) What is the difference between covered and naked short selling? 3) Is short selling consistently defined across jurisdictions? The author argues that short selling should be given more thought before definite decisions are taken and that restricting short selling is costly because of the difficulty in definining precisely the banned transactions and the complexity in enforcing such rules. The author concludes asking whether restrictions on short selling would survive a rigorous cost/benefit analysis.

Suggested Citation

  • Cinquegrana, Piero, 2009. "Short Selling: A known unknown," ECMI Papers 1671, Centre for European Policy Studies.
    • Handle: RePEc:eps:ecmiwp:1671
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    References listed on IDEAS

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    1. Honghui Chen & Vijay Singal, 2003. "Role of Speculative Short Sales in Price Formation: The Case of the Weekend Effect," Journal of Finance, American Finance Association, vol. 58(2), pages 685-705, April.
    2. Honghui Chen & Vijay Singal, 2003. "Role of Speculative Short Sales in Price Formation: The Case of the Weekend Effect," Journal of Finance, American Finance Association, vol. 58(2), pages 685-706, April.
    3. Ernan Haruvy & Charles N. Noussair, 2006. "The Effect of Short Selling on Bubbles and Crashes in Experimental Spot Asset Markets," Journal of Finance, American Finance Association, vol. 61(3), pages 1119-1157, June.
    4. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-1168, September.
    5. Safieddine, Assem & Wilhelm, William J, Jr, 1996. "An Empirical Investigation of Short-Selling Activity Prior to Seasoned Equity Offerings," Journal of Finance, American Finance Association, vol. 51(2), pages 729-749, June.
    6. 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.
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