Research and publications

Spillover Effects of Counter-cyclical Market Regulation: Evidence from the 2008 Ban on Short Sales

The ban on shorting had negative effects on the hedge fund industry. It also had a negative impact on the returns and the market quality of the stocks placed off limits by the ban. This paper examines the impact of the ban on broad market indices in the US and in Europe (the United Kingdom, France, and Germany). Since these indices and their performance are of great concern to the asset management and hedge fund industries, it is important for practitioners and policy-makers to understand the impact of changing the rules of the game (banning short sales) on the return distribution of these indices and to assess the potential spillover effects of a counter-cyclical regulation affecting only one segment of the financial market. The paper shows that the ban had a broad impact on the markets. A revisited version of this paper was published in the Winter 2011 issue of the Journal of Alternative Investments.

Author(s):

Abraham Lioui

Summary:

The ban on shorting had negative effects on the hedge fund industry. It also had a negative impact on the returns and the market quality of the stocks placed off limits by the ban. This paper examines the impact of the ban on broad market indices in the US and in Europe (the United Kingdom, France, and Germany). Since these indices and their performance are of great concern to the asset management and hedge fund industries, it is important for practitioners and policy-makers to understand the impact of changing the rules of the game (banning short sales) on the return distribution of these indices and to assess the potential spillover effects of a counter-cyclical regulation affecting only one segment of the financial market. The paper shows that the ban had a broad impact on the markets. A revisited version of this paper was published in the Winter 2011 issue of the Journal of Alternative Investments.

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Type :	EDHEC Publication
Date :	04/06/2010
Keywords :	Business Analysis

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