Market impacts of the 2020 short selling bans

Alessandro Spolaore and Caroline Le Moign

Journal of Financial Research, 2023, vol. 46, issue S1, S29-S58

Abstract: At the height of the COVID‐19 related market stress in March 2020, six European countries implemented market‐wide short selling bans. Based on a difference‐in‐difference approach using regulatory data, our estimation finds that the bans are associated with a deterioration in liquidity and trading volumes, and a decrease in volatility, without evidence of price impact. Remarkably, the negative impact persisted after the bans' lift. Liquidity deterioration appears stronger for liquid shares‐ large‐cap, highly fragmented stocks, and stocks with listed derivatives. Sectoral effects are noticed for the stocks most affected by the market stress. Finally, no displacement effect was observed.

Date: 2023
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https://doi.org/10.1111/jfir.12355

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