Waterloo, Canada – April 16, 2013 – Bans on short selling do not contribute to enhancing financial stability and can even amplify positive feedback trading during periods of high volatility. These are the main findings on a new paper from The Centre for International Governance Innovation (CIGI).

In Are Short Sellers Positive Feedback Traders? Evidence from the Global Financial Crisis, authors Martin T. Bohl, Arne C. Klein and Pierre L. Siklos examine bans on selected financial stocks in six countries during the 2008-2009 global financial crisis, which provided a setting to analyze the impact of short-sale restrictions on feedback trading.

The authors’ conclusions include:

  • Despite the well-known history of short selling during times of financial turmoil, the current literature is almost completely silent on the impact of short-sale constraints on institutional investors’ feedback trading behavior;
  • Banning short sellers may actually amplify market downturns rather than attenuate them;
  • When considered with the many studies reporting a deterioration in pricing efficiency and market quality under short-sale constraints such as rising bid-ask spreads, these findings suggest that the bans have a negative net effect.

For more information on Are Short Sellers Positive Feedback Traders? Evidence from the Global Financial Crisis, including a free PDF download, visit http://www.cigionline.org/publications/2013/4/are-short-sellers-positive-feedback-traders-evidence-global-financial-crisis

The paper was produced under the project Essays in Financial Governance: Promoting Cooperation in Financial Regulation and Policies, which is supported by a 2011-2012 CIGI Collaborative Research Award held by Martin T. Bohl, Badye Essid, Arne Christian Klein, Pierre L. Siklos and Patrick Stephan. For more information on CIGI Collaborative Research Awards, see http://www.cigionline.org/research-awards

Martin T. Bohl
is professor of economics, Centre for Quantitative Economics, Westphalian Wilhelminian University of Münster. From 1999 to 2006, he was a professor of finance and capital markets at the European University Viadrina Frankfurt (Oder). His research focuses on monetary theory and policy as well as financial market research.

Arne C. Klein is an assistant lecturer in Department of Economics at the Westphalian Wilhelminian University of Münster. From July to October 2011, he was a visiting scholar at Wilfrid Laurier University, Waterloo, Canada.

Pierre L. Siklos, a CIGI senior fellow, is the director of the Viessmann European Research Centre at Wilfrid Laurier University, and a research associate at Australian National University's Centre for Macroeconomic Analysis. His research interests are in applied time series analysis and monetary policy, with a focus on inflation and financial markets.

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The Centre for International Governance Innovation (CIGI) is an independent, non-partisan think tank on international governance. Led by experienced practitioners and distinguished academics, CIGI supports research, forms networks, advances policy debate and generates ideas for multilateral governance improvements. Conducting an active agenda of research, events and publications, CIGI’s interdisciplinary work includes collaboration with policy, business and academic communities around the world. CIGI was founded in 2001 by Jim Balsillie, then co-CEO of Research In Motion (BlackBerry), and collaborates with and gratefully acknowledges support from a number of strategic partners, in particular the Government of Canada and the Government of Ontario. For more information, please visit www.cigionline.org.

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