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Market declines: Is banning short selling the solution?

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  • Robert Battalio
  • Hamid Mehran
  • T. Paul Schultz

Abstract

In response to the sharp decline in prices of financial stocks in the fall of 2008, regulators in a number of countries banned short selling of particular stocks and industries. Evidence suggests that these bans did little to stop the slide in stock prices, but significantly increased costs of liquidity. In August 2011, the U.S. market experienced a large decline when Standard and Poor’s announced a downgrade of U.S. debt. Our cross-sectional tests suggest that the decline in stock prices was not significantly driven or amplified by short selling. Short selling does not appear to be the root cause of recent stock market declines. Furthermore, banning short selling does not appear to prevent stock prices from falling when firm-specific or economy-wide economic fundamentals are weak, and may impose high costs on market participants.

Suggested Citation

  • Robert Battalio & Hamid Mehran & T. Paul Schultz, 2011. "Market declines: Is banning short selling the solution?," Staff Reports 518, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:518
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    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr518.pdf
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    References listed on IDEAS

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    1. Alessandro Beber & Marco Pagano, 2013. "Short-Selling Bans Around the World: Evidence from the 2007–09 Crisis," Journal of Finance, American Finance Association, vol. 68(1), pages 343-381, February.
    2. Asquith, Paul & Pathak, Parag A. & Ritter, Jay R., 2005. "Short interest, institutional ownership, and stock returns," Journal of Financial Economics, Elsevier, vol. 78(2), pages 243-276, November.
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    Cited by:

    1. Alessandro Beber & Daniela Fabbri & Marco Pagano & Saverio Simonelli, 2015. "Short-Selling Bans and Bank Stability," CSEF Working Papers 423, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 15 Dec 2017.

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    Keywords

    Stock - Prices ; Liquidity (Economics) ; Credit ratings;

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