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):
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
About EDHEC
Operating from campuses in Lille, Nice, Paris, London and Singapore, EDHEC is one of the top 10 European business schools. Fully international and directly connected to the business world, EDHEC is a school for business, rather than a business school, where excellence in teaching and research focuses on innovation to stimulate entrepreneurship and creativity. EDHEC functions as a genuine laboratory of ideas and produces innovative solutions valued by businesses. The School’s teaching philosophy, inspired by its award-winning research activities, focuses on “learning by doing”.
