Evaluating the main outcomes of short-selling bans

Abstract

Short-selling has been a controversial trading strategy for a long time. Short-selling involves the borrowing of shares and selling them with the intent to repurchase them when there is a drop in the share price. Hence, investors will make a profit only if the repurchase price is lower than the selling price. Short-selling was even more controversial during rough times in the market especially during the 2008 financial crisis and also due to the collapse of Lehman Brothers and Northern Rock. As a result, regulators have banned short selling, so that other market players rebuild confidence and minimise the catastrophic consequences in the market. The regulators had banned short-selling again in 2011, this time the ban was focused on specific countries in Europe mainly: France, Italy, Belgium and Spain (FIBS). Short-selling throughout the years has been heavily attacked by regulators, however it has also been used as a regulatory tool. Some of the market players state that short - selling enhances market efficiency and that when it is restricted it can have some effects in the market, while other market players argue that the ban is of utmost importance to get the market back on track. This study is going to investigate both the intended and unintended outcomes of these bans on short selling. Consequently, during this study, it is believed that one can have a clear answer to the issue on the main effects that short - selling bans bring whether positive or negative. This study is intended to analyse and collect the information both from primary data and also from secondary data, already available in the market. Hopefully, with the help of the gathered data, the main outcomes that arise from the bans both intended and unintended can be concluded. I am aware that there are other variables that can affect my results which can be unrelated to the short-selling bans.