This paper investigates the impact of short sale bans on the market microstructure of equity markets by focusing on three major stock market characteristics: (How) did the ban affect stock liquidity, (how) did the ban influence price efficiency, and did the regulators manage to stabilize stock prices by imposing short sale bans?
On March 12, 2020, the EURO STOXX 50, the major European stock index declined by more than 12% - the largest loss ever reported on a single day since index inception in 1986. Other major stock indices around the globe experienced a similar drop. The Covid-19 crisis was about to hit and there was great uncertainty among investors, reflected by very volatile stock markets. The corresponding volatility index VSTOXX had its peak on March 16, 2020, with an implied volatility of 86%.
To stabilize capital markets and restore the confidence of investors during volatile times, regulators can make use of temporary bans on short sales, i.e., restricting investors in their ability to profit from declining stock prices. This was the case in numerous countries during the financial crisis in 2007-09.
Table of Content
List of Figures
List of Tables
List of Abbreviations
List of Symbols
1 Introduction
2 Short Selling (Bans)
2.1 The Idea of Short Selling
2.2 Evolution of Short Selling (Bans)
2.3 European Short Sale Bans in 2020
3 Literature Overview
4 Stock Liquidity
4.1 Variables and Data
4.2 Methodology
4.3 Empirical Results
4.4 Robustness Check
4.5 Effects of the Ban Lift
4.6 Country-by-Country Analysis
5 Price Efficiency
6 Stock Prices
7 Conclusion
Appendix
Bibliography
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