Working Paper: CEPR ID: DP11090
Authors: Alessandro Beber; Daniela Fabbri; Marco Pagano; Saverio Simonelli
Abstract: In both the subprime crisis and the eurozone crisis, regulators imposed bans on short sales, aimed mainly at preventing stock price turbulence from destabilizing financial institutions. Contrary to the regulators’ intentions, financial institutions whose stocks were banned experienced greater increases in the probability of default and volatility than unbanned ones, and these increases were larger for more vulnerable financial institutions. To take into account the endogeneity of short sales bans, we match banned financial institutions with unbanned ones of similar size and riskiness, and instrument the 2011 ban decisions with regulators’ propensity to impose a ban in the 2008 crisis.
Keywords: ban; bank stability; financial crisis; shortselling; systemic risk
JEL Codes: G01; G12; G14; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulatory behavior during 2008 crisis (G28) | short sales bans during 2011 crisis (G28) |
| short sales bans (G21) | probability of default (G33) |
| short sales bans (G21) | stock return volatility (G17) |
| short sales bans (G21) | declines in stock returns (G17) |
| short sales bans (G21) | exacerbation of perceived insolvency (G33) |