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Are Short Sellers Positive Feedback Traders? Evidence from the Global Financial Crisis

During the recent global financial crisis, regulators, politicians and high-profile media coverage blamed short sellers for amplifying stock market downturns. Regulatory authorities in a number of countries imposed short-sale constraints aimed at preventing excessive stock market declines. This paper examines bans on selected financial stocks in six countries during the 2008-2009 global financial crisis. These provided a setting to analyze the impact of short-sale restrictions on feedback trading. The findings suggest that, in the majority of markets examined, restrictions of this kind amplify positive feedback trading during periods of high volatility and, hence, contribute to stock market downturns. On balance, therefore, short-selling bans do not contribute to enhancing financial stability.

About the Author

CIGI Senior Fellow Pierre Siklos is also a researcher at Australian National University’s Centre for Macroeconomic Analysis and at the Rimini Centre for Economic Analysis.

Series: CIGI Papers Series

CIGI Papers present in-depth analysis and discussion on governance-related subjects. They include policy papers that present CIGI experts' positions or contributions to policy debates, and background papers that contain research findings, insights and data that contribute to the development of policy positions.

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