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.

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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.
  • 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.

  • Pierre Siklos is a CIGI senior fellow. His research interests include applied time series analysis and monetary policy, with a focus on inflation and financial markets.

  • Arne C. Klein is an assistant lecturer in the 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.