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Which Short-Selling Regulation is the Least Damaging to Market Efficiency? Evidence from Europe

Oscar Bernal Diaz, Astrid Herinckx and Ariane Szafarz

No 13-001, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: Exploiting cross-sectional and time-series variations in European regulations during the July 2008 – June 2009 period, we show that: 1) Prohibition on covered short selling raises bid-ask spread and reduces trading volume, 2) Prohibition on naked short selling raises both volatility and bid-ask spread, 3) Disclosure requirements raise volatility and reduce trading volume, and 4) No regulation is effective against price decline. Overall, all short-sale regulations harm market efficiency. However, naked short-selling prohibition is the only regulation that leaves volumes unchanged while addressing the failure to deliver. Therefore, we argue that this is the least damaging to market efficiency.

Keywords: short selling; disclosure requirement; market efficiency; regulation; volatility (search for similar items in EconPapers)
JEL-codes: G00 G14 G18 K20 O52 (search for similar items in EconPapers)
Pages: 47 p.
Date: 2013-01-09
New Economics Papers: this item is included in nep-eec, nep-eur and nep-mst
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Related works:
Journal Article: Which short-selling regulation is the least damaging to market efficiency? Evidence from Europe (2014) Downloads
Journal Article: Which short-selling regulation is the least damaging to market efficiency? Evidence from Europe (2014) Downloads
Working Paper: Which Short-Selling Regulation is the Least Damaging to Market Efficiency? Evidence from Europe (2012)
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