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Which Short-Selling Regulation is the Least Damaging to Market Efficiency? Evidence from Europe

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  • Oscar Bernal Diaz
  • Astrid Herinckx
  • Ariane Szafarz

Abstract

Exploiting cross-sectional and time-series variations in European regulations during the July 2008 – June 2009 period, we show that: 1) Prohibition on covered short selling raises bid-ask spread and reduces trading volume, 2) Prohibition on naked short selling raises both volatility and bid-ask spread, 3) Disclosure requirements raise volatility and reduce trading volume, and 4) No regulation is effective against price decline. Overall, all short-sale regulations harm market efficiency. However, naked short-selling prohibition is the only regulation that leaves volumes unchanged while addressing the failure to deliver. Therefore, we argue that this is the least damaging to market efficiency.

Suggested Citation

  • Oscar Bernal Diaz & Astrid Herinckx & Ariane Szafarz, 2013. "Which Short-Selling Regulation is the Least Damaging to Market Efficiency? Evidence from Europe," Working Papers CEB 13-001, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:sol:wpaper:2013/136916
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    References listed on IDEAS

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    Cited by:

    1. Marco Valerio Geraci & Tomas Garbaravicius & David Veredas, 2016. "Short Selling in the Tails," Working Papers ECARES ECARES 2016-30, ULB -- Universite Libre de Bruxelles.
    2. Marie Briere & Ariane Szafarz, 2017. "Factor Investing: The Rocky Road from Long-Only to Long-Short," Working Papers CEB 17-013, ULB -- Universite Libre de Bruxelles.

    More about this item

    Keywords

    short selling; disclosure requirement; market efficiency; regulation; volatility;

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G00 - Financial Economics - - General - - - General
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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