Short-selling restrictions and financial stability in Europe: Evidence from the Covid-19 crisis

Wolfgang Bessler and Marco Vendrasco

Journal of International Financial Markets, Institutions and Money, 2022, vol. 80, issue C

Abstract: In March 2020, six European countries imposed temporary short-selling bans to prevent further stock price declines, to reduce volatility, and to ensure financial stability during the Covid-19 pandemic, whereas other countries abstained from implementing these restrictions. We examine the effects of these regulatory interventions on stock returns and market quality for major European countries with and without bans. Our results reveal that restricting short selling did not stabilize stock prices but adversely affected market liquidity, as reflected in wider bid-ask spreads and lower turnover. In addition, smaller stock markets and smaller firms suffered more from the deterioration in market quality. Using logit regressions, we investigate the determinants for the probability that a country would impose short-selling restrictions. The results suggest that countries with weaker economies, lower fiscal capacity, less financial development, and stricter lockdown measures were more likely to adopt a ban. Overall, short-selling bans during the Covid-19 crisis negatively affected market quality and consequently regulators in general should abstain from implementing such restrictions in the future.

Keywords: Short-selling ban; Market-quality measures; Covid-19; Liquidity; Volatility (search for similar items in EconPapers)
JEL-codes: D02 G12 G14 G18 G28 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:80:y:2022:i:c:s1042443122000907

DOI: 10.1016/j.intfin.2022.101612

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