Now that the dust has settled on the action taken to limit short selling during the financial crisis, The Centre for Economic Policy Research has prepared a report that examines how effective the bans were.
The Centre sifted through the evidence generated by the various regime changes to investigate the impact of the bans on liquidity, price discovery and stock returns.
Since the bans were enacted and lifted at different dates in different countries, and in some countries applied to financial stocks only, they were able to identify their effects with panel data techniques ie data containing observations on multiple phenomena observed over multiple time periods.
In summary, they have concluded that the bans:
- were detrimental for liquidity, especially for stocks with small market capitalization and high volatility;
- slowed down price discovery, especially in bear market phases, and
- failed to support stock prices
