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Which financial stocks did short sellers target in the subprime crisis?

Iftekhar Hasan, Nadia Massoud, Anthony Saunders and Keke Song

No 3/2015, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: Tracing the SEC ban on the short selling of financial stocks in September 2008, this paper investigates whether such selling activity before the 2008 short ban reflected financial companies' risk exposures in the subprime crisis. The evidence suggests that short sellers sold short stocks that had the greatest asset and insolvency risk exposures, and that the short selling of financial firms' stocks was not significantly greater than that of non-financial firms. When the short ban was in effect, the market quality of financial stocks without subprime asset exposure had deteriorated to a larger degree than that of financial companies with subprime asset exposure. The findings imply that such a regulation may mute the market disciplining effects of investors and may also serve as a counterweight to any perceived macro or systemic risk reduction benefits resulting from such a ban.

Keywords: short selling; subprime assets; financial crisis; short-sale ban; CDS spread (search for similar items in EconPapers)
JEL-codes: G01 G14 G18 G28 G33 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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