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When protection backfires: How short selling bans weaken market resiliency

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  • Félez-Viñas, Ester

Abstract

This paper studies how short selling bans affect market resiliency, defined as the ability of securities to recover from liquidity shocks. Using high-frequency limit order book data, I show that resiliency deteriorates following the ban: bid–ask spreads and market depth take significantly longer to revert to normal levels, with effects persisting for the duration of the bans. The evidence suggests that restrictions expel informal liquidity providers, reducing competition in liquidity supply. Although short selling bans are often imposed to stabilize markets, including during the COVID-19 crisis, the results quantify a market quality cost—slower liquidity recovery—that policymakers should weight against potential stability benefits.

Suggested Citation

  • Félez-Viñas, Ester, 2026. "When protection backfires: How short selling bans weaken market resiliency," Finance Research Letters, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:finlet:v:87:y:2026:i:c:s1544612325023694
    DOI: 10.1016/j.frl.2025.109120
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    References listed on IDEAS

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