Structural and Market Efficacy Implications of the Short-Sell Ban in Europe

Abstract

This article seeks to estimate the impact of the ban imposed on short selling by various market regulators across Europe in late 2008, at the peak of the financial crisis. The authors select the STOXX 600 constituents as their universes and do an event study of the ban period, in contrast with the preand post ban-period for the same universe of stocks. In particular, the article reports what impact the ban had, if any, on the efficiency of the market (abnormal returns, volatility, etc.) and market microstructure variables (spread, shape of the order book, etc.), using tick data from Reuters. The authors find a deleterious effect on both sets of variables during the ban, even after controlling for the general crisis like market environment (using STOXX 600 stocks not under the purview of the ban).