Spillover Effects of Counter-cyclical Market Regulation: Evidence from the 2008 Ban on Short Sales

The ban on shorting had negative effects on the hedge fund industry. It also had a negative impact on the returns and the market quality of the stocks placed off limits by the ban.

Author(s):

Abraham Lioui

Professor of Finance, EDHEC Business School and Member, EDHEC Risk Institute

We look at the impact of the ban on broad market indices in the US and in Europe (the United Kingdom, France, and Germany). Since these indices and their performance are of great concern to the asset management and hedge fund industries, it is important for practitioners and policymakers to understand the impact of changing the rules of the game (banning short sales) on the return distribution of these indices and to assess the potential spillover effects of a counter-cyclical regulation affecting only one segment of the financial market. We show that the ban had a broad impact on the markets. It was responsible for a substantial increase in market volatility. The impact of the ban on the higher moments of index returns is not systematic (skewness and kurtosis of the return distribution of only few indices were affected) or robust (using some robust measures of higher moments makes the impact of the ban disappear). Thus, the ban did not ease the downward pressure in the financial markets. The market seems not to believe that short sellers or the hedge fund industry were responsible for the turmoil of 2008.

Type: Position paper
Date: le 07/04/2010
Research Cluster : Finance

See Also

Financial Times ranks EDHEC Executive Education among the Top 10 worldwide
News
- 23-05-2022
EDHEC Business School’s executive education offers rank among the Top 10 globally...
EDHEC partners with VIVATECH 2022 and offers 400 tickets to EDHEC students
News
- 20-05-2022
EDHEC is once again a partner of the unmissable tech event of the year, Viva Technology...
(Invitation) Inauguration of the Management in Innovative Health Chair - May 30, 2022 in Paris
News
- 17-05-2022
Emmanuel Métais, Dean of EDHEC Business School and Christophe Durand, General Manager...
News
- 10-05-2022
Live on YouTube !