EDHEC-Risk Institute denounces short selling bans

EDHEC-Risk Institute condemns the August 11 decisions by the financial market authorities in Belgium, France, Italy and Spain to impose or extend short-selling bans in the wake of renewed market volatility.

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These hasty decisions are not only devoid of theoretical basis, but also fly in the face of empirical evidence. Academic studies, including work by EDHEC-Risk Institute researchers, have documented the positive contribution of short-sellers to market efficiency and shown that constraining short sales significantly reduces market quality – by reducing liquidity and increasing volatility – and can have unintended spillover effects.

In a series of research articles, EDHEC Business School Professor Ekkehart Boehmer and his co-authors have studied short selling activities[1], looking at the type of information possessed by short-sellers , at the impact between short selling activities and abnormal returns[2], and at the link between short-selling and the price discovery process[3]. They established that short sellers are important contributors to efficient stock prices, that short interest contains valuable information for the market, that information is impounded faster and more efficiently into prices when short sellers are more active and that short sellers change their trading around extreme return events in a way that aids price discovery.

Professor Boehmer and co-authors, and EDHEC Business School Professor Abraham Lioui have also looked at the consequences of the previous short selling bans imposed in the USA, UK and continental Europe in 2008. The study led by Professor Boehmer concluded that stocks subject to the US ban suffered a severe degradation in market quality, as measured by spreads and price impacts (i.e. liquidity), and intraday volatility. The most recent study by Professor Lioui[4] focused on the impact of the bans on leading market and financial indices in the US, France, the UK and Germany and found that these led to a systematic increase in the volatility of market indices and had an even stronger impact on financial indices. None of the studies found indication that short-selling bans reduced downward pressure in a significant manner.

Against this backdrop, EDHEC-Risk Institute denounces the decisions to impose or extend short-selling bans as a political smokescreen that is likely to be counterproductive, both directly by disrupting market functioning and degrading market quality at a most testing time, and indirectly by further fuelling defiance vis-à-vis sovereign states and the continued inability of their political institutions to address the causes of the current crisis.

Next Finance August 2011

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[1] Which shorts are informed? Ekkehart Boehmer, Charles Jones et Xiaoyan Zhang. Journal of Finance 63, 2008, 491-528 (Finaliste du prix Smith Breeden 2008 et récompensé par une bourse de la fondation BSI Gamma.)

[2] The good news in short interest. Ekkehart Boehmer, Brad Jordan et Zsuzsa Huszar. Journal of Financial Economics 96, 2010, 80-97 (Prix Fama/DFA du meilleur article paru dans le Journal of Financial Economics au cours de l’année.)

[3] Short selling and the price discovery process. Ekkehart Boehmer et Julie Wu. EDHEC-Risk Institute Working Paper, May 2010.

[4] Spillover Effects of Counter-Cyclical Market Regulation: Evidence from the 2008 Ban on Short Sales. Abraham Lioui. The Journal of Alternative Investments 13, 2011, 53-66.




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