Market declines: is banning short selling the solution?

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Staff Report ; No. 518

Classification and Topics

• Classification: Wirtschaft ; Financial Crises ; Asset Pricing; Trading Volume; Bond Interest Rates ; Information and Market Efficiency; Event Studies; Insider Trading ; General Financial Markets: Government Policy and Regulation
• Subject: short selling ; down grade

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Battalio, Robert ; Mehran, Hamid ; Schultz, Paul
• Event: Veröffentlichung
• (who): Federal Reserve Bank of New York
• (where): New York, NY
• (when): 2011

Further information

• Handle: http://hdl.handle.net/10419/60838
• Last update: 10.03.2025, 11:44 AM CET