The 2011 European Short Sale Ban: A Cure or a Curse?

L. Felix, R.G.W. Kraeussl, P.A. Stork

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

This paper examines whether the 2011 European short sale ban on financial stocks proved to be successful or had a negative impact on financial markets. We explicitly take an options market perspective and focus on market participants’ changes in beliefs and expectations. During the ban, short positions in banned stocks decreased, whereas they increased for non-banned stocks. Our results indicate that the ban increased implied jump risk levels, thereby negatively impacting the banned financial stocks. However, we also observe that after the announcement of the ban, financial contagion risk actually dropped for banned stocks. Instead of a substitution effect between regular short selling and synthetic shorting through single stock puts, we observe a migration out of single stock puts into the EuroStoxx 50 index options market. We conclude that this type of migration diversified selling pressure initially concentrated in financial stocks across a larger share of the stock market, thereby reducing systemic risks and enhancing overall financial stability.
Original languageEnglish
Pages (from-to)115-131
JournalJournal of Financial Stability
Volume25
Issue numberAugust
DOIs
Publication statusPublished - 2016

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Short sales
Options markets
Financial markets
Jump risk
Announcement
Index options
Substitution effect
Financial contagion
Financial stability
Short selling
Stock market
Banking risk
Systemic risk

Cite this

Felix, L. ; Kraeussl, R.G.W. ; Stork, P.A. / The 2011 European Short Sale Ban: A Cure or a Curse?. In: Journal of Financial Stability. 2016 ; Vol. 25, No. August. pp. 115-131.
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The 2011 European Short Sale Ban: A Cure or a Curse? / Felix, L.; Kraeussl, R.G.W.; Stork, P.A.

In: Journal of Financial Stability, Vol. 25, No. August, 2016, p. 115-131.

Research output: Contribution to JournalArticleAcademicpeer-review

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