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

Bernal, Oscar; Herinckx, Astrid; Szafarz, Ariane

doi:10.2139/ssrn.2011435

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

Centre Emile Berheim Working Paper

45 Pages Posted: 27 Feb 2012 Last revised: 26 May 2016

See all articles by Oscar Bernal

Ariane Szafarz

Université Libre de Bruxelles (ULB), Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi

There are 2 versions of this paper

Date Written: December 1, 2012

Abstract

Exploiting cross-sectional and time-series variations in European regulations during the July 2008 – June 2009 period, we show that: Prohibition on covered short selling raises bid-ask spread and reduces trading volume, prohibition on naked short selling raises both volatility and bid-ask spread, disclosure requirements raise volatility and reduce trading volume, and no regulation is effective against price decline. Overall, all short-sale regulations are detrimental to 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

JEL Classification: G18, G14, G01, K20, O52

Suggested Citation: Suggested Citation

Bernal, Oscar and Herinckx, Astrid and Szafarz, Ariane, Which Short-Selling Regulation is the Least Damaging to Market Efficiency? Evidence from Europe (December 1, 2012). Centre Emile Berheim Working Paper, Available at SSRN: https://ssrn.com/abstract=2011435 or http://dx.doi.org/10.2139/ssrn.2011435