The Impact of the 2011 Short‐Sale Ban on Financial Stability: Evidence from the Spanish Stock Market

Abstract

We examine the effect of the 2011 short-selling ban on Spanish stocks on the financial sector's risk level. Before the ban, short positions were positive and significantly related to several indicators of bank default risk. Subsequently, the ban moderated the risk of banking institutions, especially those more exposed to short-seller activity, which, on average, showed higher levels of maturity mismatch, uncertainty about their fundamentals, and exposure to sovereign risk. The ban also caused a side effect on non-financial firms, since it led to an increase in their exposure to short sales, reflecting the existence of a common aggregate risk factor.

Short-Selling Bans and Bank Stability

“…The focus of this paper differs from that of previous research on short-selling bans, which extensively investigated their effects on stock returns, liquidity, and price discovery Beber and Pagano, 2013;Boehmer et al, 2013;Crane et al, 2019;Marsh and Payne, 2012), rather than their effects on financial stability. The only exceptions are the studies by Félix et al (2016) and Arce and Mayordomo (2016), both of which focus on the 2011 ban: the first finds that the ban increased the option-implied jump risk levels of financial stocks with listed options in the Belgian, French, Italian and Spanish markets, while the second shows that the ban moderated the solvency risk of Spanish banking institutions. Our study differs from these for its wider coverage, being based on data for two crises, several countries and various stability measures, as well as for its attention to endogeneity concerns.…”

Market Quality and Short-Selling Ban during the COVID-19 Pandemic: A High-Frequency Data Approach

“…Therefore, according to this measure, liquidity decreased during the SSR, something that could be expected given the role as liquidity providers that has often been assigned to short sellers. We have to remark that although the descriptive results of Losada López and Martínez (2020) are aligned with these, they followed a methodology similar to that of Arce and Mayordomo (2016) and indicated that the Amihud ratio would have been even higher without the ban. Changes at the quartile level by market capitalization are more pronounced in the extreme quartiles (Q4 and Q1) (see Table 2).…”

Empirical Insights Into the Influence of Financial Development on Capital Markets in Southeast Asia

“…Policymakers, investors, and investment managers have an interest in resolving this financial market externality. In another study, it was also stated that extreme volatility will affect European securities markets in general and banking sector stocks in particular and have an adverse impact on material threats to stability and orderly market functioning (Arce & Mayordomo, 2016). To prevent this extreme volatility, European state supervisors prohibit the formation of short positions in the stocks of financial institutions in order to maintain financial stability.…”