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A Study on the Impact of the Short Selling Ban on FIBS

Simon Grima and Stephen Sammut

International Journal of Economics & Business Administration (IJEBA), 2017, vol. V, issue 1, 18-48

Abstract: In this paper we investigate how the short selling ban affected stock markets in France, Italy, Belgium and Spain and whether the required response was really achieved and reflected in the market. Although some argue that the short selling ban was needed for the market to get back on its feet, others argue that short selling is a tool that improves market efficiency and banning such trading strategy might lead to detrimental effects on the market. Therefore, the purpose of this study was to show whether the short selling ban had a positive or negative effect, both in the short-term and long-term, on the financial markets. Moreover, to determine whether short selling is an effective tool and whether it really drives the stock prices down when the financial markets are going through bad moments. Consequently, uncover whether the short selling ban has had a permanent impact on the financial markets and whether it really had an effect on the FIBS. To do this we used market data and a selection of stock returns, which included banned stocks in the FIBS financial markets and non-banned financial stocks from non-FIBS before, during and after the short-selling ban in August 2011. It was found that the short selling ban led to higher volatility in the FIBS countries and also had a spill over effect on non-FIBS countries. Furthermore, the impact of the short selling ban on volatility was only deemed to be for a short-term period, with the exception of Spain. Also, the short selling ban slowed down price discovery in Belgium, France and non-FIBS countries, whereas the short selling ban did not affect Spain and Italy. Furthermore, all countries including the non-FIBS countries illustrated a better price discovery position after the ban was lifted; therefore the short selling ban only had a short-term impact on price discovery. Moreover, there was a long-term positive effect on prices with improvement in stock market prices for all FIBS countries with a positive impact on non-FIBS countries. However, liquidity in all FIBS and non-FIBS countries suffered a short-term negative impact.

Keywords: Short Selling Ban; FIBS; Non-FIBS; Price Discovery; Volatility; Liquidity; Financial Stock Prices; Pre-Ban Period; Ban Period; Post-Ban Period. JEL classification: G01; G15. (search for similar items in EconPapers)
Date: 2017
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