EconPapers    
Economics at your fingertips  
 

Short Changed? The Market's Reaction to the Short Sale Ban of 2008

Louis Gagnon and Jonathan Witmer ()

Staff Working Papers from Bank of Canada

Abstract: Do short sales restrictions have an impact on security prices? We address this question in the context of a natural experiment surrounding the short sale ban of 2008 using a comprehensive sample of Canadian stocks cross-listed in the U.S. Among financial stocks, which were singled out by the ban in both countries, we observe a significant increase (74 bps) in the difference between the U.S. share price and the Canadian share price. We also observe an impressive and surprising migration of the trading volume from the U.S. to Canada among financial stocks during the ban. Both price and volume effects are reversed after the ban and neither effect manifests itself among the nonfinancial stocks. Our findings support the view that prices reflect a more optimistic valuation when pessimistic investors are kept out of the market by binding short-sales restrictions (Miller (1977)). Our findings also imply that pessimistic investors were more preponderant in the U.S. than in Canada, which is corroborated by the fact that the short interest ratio for our sample stocks was much larger in the U.S. than in Canada prior to the ban.

Keywords: Financial markets; International topics (search for similar items in EconPapers)
JEL-codes: F30 G01 G18 G20 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10) Track citations by RSS feed

Downloads: (external link)
https://www.bankofcanada.ca/wp-content/uploads/2010/02/wp09-23.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:09-23

Access Statistics for this paper

More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2023-01-25
Handle: RePEc:bca:bocawp:09-23