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Short-sale constraints and financial stability: Evidence from the Spanish market

Oscar Arce () and Sergio Mayordomo ()

No 1410, Working Papers from Banco de España, Working Papers Homepage

Abstract: We examine the effect of the short-selling ban in 2011 on Spanish stocks on the level of risk in the banking sector. Before the ban, short positions were found to be positive and significantly related to the creditworthiness of medium-sized banks, these being generally less internationally diversified and more reliant on official support. We show that the ban helped stabilise the credit risk of medium-sized banks, especially those more exposed to short-sellers’ activity, but not that of large banks and non-financial corporations. This stabilising effect came at the cost of a significantly sharp decline in liquidity, trading and price efficiency of medium-sized banks’ stocks relative to other stocks.

Keywords: short-sales constraints; financial stability; financial institutions; credit default swap; contagion (search for similar items in EconPapers)
JEL-codes: G01 G12 G14 G18 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2014-06
New Economics Papers: this item is included in nep-ban and nep-rmg
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