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Short Sales Constraints and Financial Stability: Evidence from the Spanish 2011 Ban

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  • Óscar Arce

    ()
    (Directorate General Economics, Statistics and Research, Bank of Spain)

  • Sergio Mayordomo

    ()
    (School of Economics and Business Administration, University of Navarra)

Abstract

This paper studies the main effects of the short sales ban implemented in August 2011 in the Spanish stock market along two dimensions: financial stability and market performance. Regarding the first, we show that short positions were a significant determinant of the probability of default of medium-sized banks before the ban. We find that, by weakening the contagion effect coming from the sovereign risk, the ban helped stabilise the probability of default of medium-sized banks, an effect which is not significant in the case of the largest banks and non-financials. Nonetheless, the stabilising power of the ban came at the cost of a large decline in the relative liquidity, trading volumes and price information efficiency of medium-sized banks’ stocks.

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File URL: http://www.unav.es/facultad/econom/files/workingpapersmodule/@random50169a3d22927/1356050306_WP_UNAV_25_12.pdf
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Bibliographic Info

Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 25/12.

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Length: 46 pages
Date of creation: 21 Dec 2012
Date of revision:
Handle: RePEc:una:unccee:wp2512

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Web page: http://www.unav.es/facultad/econom

Related research

Keywords: Short-sales constraints; financial stability; financial institutions; credit default swap; contagion;

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  1. Eric C. Chang & Joseph W. Cheng & Yinghui Yu, 2007. "Short-Sales Constraints and Price Discovery: Evidence from the Hong Kong Market," Journal of Finance, American Finance Association, vol. 62(5), pages 2097-2121, October.
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  13. Harrison Hong & Jeremy C. Stein, 2003. "Differences of Opinion, Short-Sales Constraints, and Market Crashes," Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 487-525.
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  16. 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.
  17. 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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