Banning Cassandra from the Market? An Empirical Analysis of Short-Selling Bans during the Covid 19 Crisis

Banning Cassandra from the Market? An Empirical Analysis of Short-Selling Bans during the Covid 19 Crisis

Gianfranco Siciliano, Marco Ventoruzzo

Series number :

Serial Number: 
532/2020

Date posted :

July 22 2020

Last revised :

July 22 2020
SSRN Share

Keywords

  • Equity Markets • 
  • Covid-19 Pandemic • 
  • Short-selling bans

During the recent COVID-19 pandemic crisis, stock markets around the world have witnessed an abrupt decline in security prices and an unprecedented increase in security volatility.

In response to a week of financial turmoil on the main European stock markets, some market regulators in Europe, including France, Austria, Italy, Spain, Greece, and Belgium, passed temporary short-selling bans in an attempt to stop downward speculative pressures on the equity market and stabilize and maintain investors’ confidence. This paper examines the effects of these shortselling bans on market quality during the recent pandemic caused by the spread of COVID-19. Our results suggest that during the crisis, banned stocks had higher information asymmetry, lower liquidity, and lower abnormal returns compared with non-banned stocks. These findings confirm prior theoretical arguments and empirical evidence in other settings that short-selling bans are not effective in stabilizing financial markets during periods of heightened uncertainty. In contrast, they appear to undermine the policy goals market regulators intended to promote.

Authors

Real name:
Gianfranco Siciliano
Research Member, Representative Member
Paolo Baffi Center on Financial Regulation, Bocconi University Law Department