Waterloo, Canada – May 9, 2013 – Bans on short selling in times of high uncertainty can lead to adverse herding behaviour, says a new paper from The Centre for International Governance Innovation (CIGI).
In Short-Selling Bans and Institutional Investors’ Herding Behaviour: 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. In particular, the authors focused on short-sale constraints’ effect on institutional investors’ trading behaviour and the possibility of generating herding behaviour.
The authors’ conclusions include:
- short-selling restrictions exhibit either no influence on herding formation or induce adverse herding. This implies a higher dispersion of returns around the market compared to rational asset pricing, which can be interpreted as an increase in uncertainty among stock market investors;
- restricting short sellers causes uncertainty about stock prices, which, in turn, may reduce an investor’s trust in the market consensus resulting in adverse herd behaviour;
- and, short-sale bans may also affect the pricing process via institutional investors’ trading because these investors dominate mature stock markets.
For more information on Short-Selling Bans and Institutional Investors’ Herding Behaviour: Evidence from the Global Financial Crisis, including a free PDF download, visit http://www.cigionline.org/publications/2013/5/short-selling-bans-and-institutional-investors-herding-behaviour-evidence-global.
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
ABOUT THE AUTHORS:
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.
Declan Kelly, Communications Specialist, CIGI
Tel: 519.885.2444, ext. 7356, Email: [email protected]
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.