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Short-sale constraints and financial stability: Evidence from the Spanish market

Author

Listed:
  • Óscar Arce

    (Banco de España)

  • Sergio Mayordomo

    (University of Navarra)

Abstract

We examine the effect of the short-selling ban in 2011 on Spanish stocks on the level of risk in the banking sector. Before the ban, short positions were found to be positive and significantly related to the creditworthiness of medium-sized banks, these being generally less internationally diversified and more reliant on official support. We show that the ban helped stabilise the credit risk of medium-sized banks, especially those more exposed to short-sellers’ activity, but not that of large banks and non-financial corporations. This stabilising effect came at the cost of a significantly sharp decline in liquidity, trading and price efficiency of medium-sized banks’ stocks relative to other stocks.

Suggested Citation

  • Óscar Arce & Sergio Mayordomo, 2014. "Short-sale constraints and financial stability: Evidence from the Spanish market," Working Papers 1410, Banco de España.
    • Handle: RePEc:bde:wpaper:1410
    as

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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/14/Fich/dt1410e.pdf
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    References listed on IDEAS

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    Cited by:

    1. Xuewen Liu, 2015. "Short-Selling Attacks and Creditor Runs," Management Science, INFORMS, vol. 61(4), pages 814-830, April.
    2. repec:ers:journl:v:v:y:2017:i:1:p:18-48 is not listed on IDEAS
    3. Simon Grima & Stephen Sammut, 2017. "A Study on the Impact of the Short Selling Ban on FIBS," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 18-48.

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    More about this item

    Keywords

    short-sales constraints; financial stability; financial institutions; credit default swap; contagion;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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