The Argument Against Short Selling

Abstract

This article assesses the (potential) adverse consequences of short-selling restrictions for the implementation of risk management procedures and their knock-on effects on government borrowing costs. To that end, the focal point is on the explanation of the benefits of short-selling from a risk management perspective, supported by real-world examples of hedging techniques in cash and derivatives markets for government securities. The spotlight is on short-selling as a tool for risk management, while the article is in principle neutral about which (specific) financial instruments or markets should be used to implement these hedging strategies, except for references to possible problems in (the use of) sovereign CDS markets.

Keywords: sovereign debt, shorting, risk management

JEL Classification: E44, G01, G21, G28, E61, H21