CIAO DATE: 05/2013
April 2013
Centre for International Governance Innovation
During the recent global financial crisis, regulators, politicians and high-profile media coverage blamed short sellers for amplifying stock market downturns. Regulatory authorities in a number of countries imposed short-sale constraints aimed at preventing excessive stock market declines. This paper examines bans on selected financial stocks in six countries during the 2008-2009 global financial crisis. These provided a setting to analyze the impact of short-sale restrictions on feedback trading. The findings suggest that, in the majority of markets examined, restrictions of this kind amplify positive feedback trading during periods of high volatility and, hence, contribute to stock market downturns. On balance, therefore, short-selling bans do not contribute to enhancing financial stability.
Resource link: Are Short Sellers Positive Feedback Traders? Evidence from the Global Financial Crisis [PDF]