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

  • Oscar Bernal Diaz
  • Astrid Herinckx
  • Ariane Szafarz

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.

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Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 13-001.

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Length: 47 p.
Date of creation: 09 Jan 2013
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Publication status: Published by:
Handle: RePEc:sol:wpaper:2013/136916
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