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Short-Selling Equity Exchange Traded Funds and Its Effect on Stock Market Liquidity

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  • Karmaziene, Egle
  • Sokolovski, Valeri

Abstract

We examine short selling of equity exchange traded funds (ETFs) using the 2008 short-sale ban. Contrasting the previously documented contractions in bearish strategies during the ban, we find a significant increase in short sales of the largest, most liquid ETF, the S&P 500 Spider. We offer evidence suggesting that this upsurge was driven primarily by investors circumventing the ban. We show that the ban’s detrimental effect on stock liquidity was around 30% less severe for the Spider’s constituents. Our results suggest that ETF shorts can substitute for short sales of individual stocks, thereby alleviating short-sale constraints’ adverse effect on liquidity.

Suggested Citation

  • Karmaziene, Egle & Sokolovski, Valeri, 2022. "Short-Selling Equity Exchange Traded Funds and Its Effect on Stock Market Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 57(3), pages 923-956, May.
    • Handle: RePEc:cup:jfinqa:v:57:y:2022:i:3:p:923-956_4
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