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Federal Reserve Bank of New York
Staff Reports
Market declines: Is banning short selling the solution?
Robert Battalio
Hamid Mehran
T. Paul Schultz
Abstract

In response to the sharp decline in prices of financial stocks in the fall of 2008, regulators in a number of countries banned short selling of particular stocks and industries. Evidence suggests that these bans did little to stop the slide in stock prices, but significantly increased costs of liquidity. In August 2011, the U.S. market experienced a large decline when Standard and Poor’s announced a downgrade of U.S. debt. Our cross-sectional tests suggest that the decline in stock prices was not significantly driven or amplified by short selling. Short selling does not appear to be the root cause of recent stock market declines. Furthermore, banning short selling does not appear to prevent stock prices from falling when firm-specific or economy-wide economic fundamentals are weak, and may impose high costs on market participants.


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Robert Battalio & Hamid Mehran & T. Paul Schultz, Market declines: Is banning short selling the solution?, Federal Reserve Bank of New York, Staff Reports 518, 2011.
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Keywords: Stock - Prices ; Liquidity (Economics) ; Credit ratings
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