The Short Selling Regulation in the EU: Assessing the Authorization Granted for ESMA to Prohibit Short Selling

• Autores: Matias Huhtilainen
• Localización: European Journal of Government and Economics, ISSN-e 2254-7088, Vol. 6, No. 1, 2017, págs. 6-23
• Idioma: inglés
• DOI: 10.17979/ejge.2017.6.1.4321
• Enlaces
  • Texto completo
• Resumen

  • The paper discusses the renewed short selling regulation (Regulation (EU) No 236/2012) in the European Union. The focus is on the provisions that deal with prohibiting short selling in exceptional market circumstances. The Regulation further enforces certain obligations to report and disclose short positions. It is concluded that banning short selling is not an effective tool to contain extreme price volatility. The difference-in-differences regression and repeated measures GLM were used to test whether short selling bans were successful in containing volatility of those Spanish and Italian stocks that were subject to two back-to-back prohibitions during the years 2011-2013. The results are consistent with the majority of previous research, suggesting that the effectiveness of short sale constraints in reducing volatility is limited at best. Furthermore, there are evidence of counterproductive effects: constraints on short selling may actually increase volatility as well as deteriorate liquidity. However, based on theory and previous studies, reporting and disclosure requirements shall be favored provided they improve market efficiency as well as supervisory work of regulatory bodies.This paper discusses the renewed short selling regulation (Regulation (EU) No 236/2012) in the European Union. The focus is on the provisions that deal with prohibiting short selling in exceptional market circumstances. The Regulation further enforces certain obligations to report and disclose short positions. It is concluded that banning short selling is not an effective tool to contain extreme price volatility. The difference-in-differences regression and repeated measures GLM were used to test whether short selling bans were successful in containing volatility of those Spanish and Italian stocks that were subject to two back-to-back prohibitions during the years 2011-2013. The results are consistent with the majority of previous research, suggesting that the effectiveness of short sale constraints in reducing volatility is limited at best. Furthermore, there are evidence of counterproductive effects: constraints on short selling may actually increase volatility as well as deteriorate liquidity. However, based on theory and previous studies, reporting and disclosure requirements shall be favored provided they improve market efficiency as well as supervisory work of regulatory bodies.

• Referencias bibliográficas
  • Appel, I., & Fohlin, C. (2010). 'Shooting the Messenger?' The Impact of Short Sale Bans in Times of Crisis. http://dx.doi.org/10.2139/ssrn.1595003
  • Australian Securities and Investments Commission (2012). Short Selling: Post-Implementation Review. Retrived from http://asic.gov.au/regulatory-resources/find-a-document/reports/rep-302-short-selling-post-implementation-review/
  • Bai, Y., Chang, E. C., & Wang, J. (2006). Asset Prices under Short-Sale Constraints. Retrived from https://stuff.mit.edu/people/wangj/pap/BCW_061112.pdf
  • Baker, M., & Wurgler, J. (2006). Investor Sentiment and the Cross-Section of Stock Returns. The Journal of Finance 61(4), 1645-1680. https://doi.org/10.1111/j.1540-6261.2006.00885.x
  • Beber, A., & Pagano, M. (2013). Short-Selling Bans Around the World: Evidence from the 2007-09 Crisis. The Journal of Finance 68(1), 343-381....
  • Bernal, O., Herinckx, A., & Szafarz, A. (2014). Which Short-Selling Regulation is the Least Damaging to Market Efficiency? Evidence from...
  • Boehmer, E., Jones, C. M., & Zhang, X. (2013). Shackling Short Sellers: The 2008 Shorting Ban. The Review of Financial Studies 26(6),...
  • Boehmer, E., & Wu, J. (2013). Short Selling and the Informational Efficiency of Prices. The Review of Financial Studies 26(2), 287-322....
  • Boulton, T. J., & Braga-Alves. M. V. (2012). Naked Short Selling and Market Returns. The Journal of Portfolio Management 38(3), 133-142....
  • Boulton, T. J., & Braga-Alves, M. V. (2010). The Skinny on the 2008 Naked Short Sale Restrictions. Journal of Financial Markets 13(4),...
  • Bris, A., Goetzmann, W. N., & Zhu, N. (2007). Efficiency and the Bear: Short Sales and Markets around the World. The Journal of Finance...
  • Brown, G. W., & Cliff, M. T. (2005). Investor Sentiment and Asset Valuation. The Journal of Business 78(2), 405-440. https://doi.org/10.1086/427633
  • Brunnermeier, M. K., & Oehmke, M. (2014). Predatory Short Selling. Review of Finance, European Finance Association 18(6), 2153-2195. https://doi.org/10.1093/rof/rft043
  • Chang, E. C., Cheng, J. W., & Yu, Y. (2007). Short-Sales Constraints and Price Discovery: Evidence from the Hong Kong Market. The Journal...
  • Charoenrook, A., & Daouk, H. (2005). A Study of Market-Wide Short-Selling Restrictions. Cornell University Working Paper. Retrived from...
  • Christophe, S. E., Ferri, M. G., & Angel, J. J. (2004). Short-Selling Prior to Earnings Announcements. Journal of Finance 59(4), 1845-1875....
  • Committee of European Securities Regulators (2010). Model for a Pan-European Short Selling Disclosure Regime. Retrived from https://www.esma.europa.eu/sites/default/files/library/2015/11/10_088.pdf
  • Datta-Chaudhuri, M. (1990). Market Failure and Government Failure. The Journal of Economic Perspectives 4(3), 25-39. https://doi.org/10.1257/jep.4.3.25
  • Diamond, D. W., & Verrecchia, R. E. (1987). Constraints on Short-Selling and Asset Price Adjustment to Private Information. Journal of...
  • Dobravolskas, A., & Seiranov, J. (2011). Financial Stability as the Goal of Post-Crisis Regulatory Reforms. Verslo Sistemos ir Ekonomika...
  • European Commission (2014). A Comprehensive EU Response to the Financial Crisis: Substantial Progress towards a Strong Financial Framework...
  • European Securities and Markets Authority (2011). ESMA Promotes Harmonised Regulatory Action on Short-Selling in the EU. Retrived from https://www.esma.europa.eu/sites/default/files/library/2015/11/esma_2011_266_uu_public_statement_on_short_selling.pdf
  • Financial Services and Markets Authority (2012). The FSMA Modifies Short Selling Rules. Retrived from http://www.fsma.be/en/Article/press/div/2012/2012-02-13_shortselling.aspx
  • Fung, J. K. W., & Draper, P. (1999). Mispricing of Index Futures Contracts and Short Sales Constraints. Journal of Futures Markets 19(6),...
  • Gregoriou, G. N. (2011). Handbook of short selling. Waltham, MA, USA: Academic Press.
  • Hansson, F., & Fors, E. (2009). Get Shorty? Market Impact of the 2008-09 U.K. Short Selling Ban. University of Gothenburg Working Papers...
  • Hellenic Capital Market Commission (2010). Guidance on HCMC’s Decision Regarding Short Selling Ban.
  • Helmes, U., Henker, J. & Henker, T. (2011). The Effect of the Ban on Short Selling on Market Efficiency and Volatility. Paper presented...
  • Huang, D., Jiang, F., Tu, J., & Zhou, G. (2015). Investor Sentiment Aligned: A Powerful Predictor of Stock Returns. Review of Financial...
  • Kolasinski, A. C., Reed, A., & Thornock, J. R. (2013). Can Short Restrictions Actually Increase Informed Short Selling? Financial Management...
  • Lecce, S., Lepone, A., & Segara, R. (2008). The Impact of Naked Short-Sales on Returns, Volatility and Liquidity: Evidence from the Australian...
  • Lee, W., Jiang, C., & Indro, D. (2002). Stock Market Volatility, Excess Returns, and the Role of Investor Sentiment. Journal of Banking...
  • Liikanen, E. (2012). High-Level Expert Group on Reforming the Structure of the EU Banking Sector. Final Report. Retrived from http://ec.europa.eu/internal_market/bank/docs/high-level_expert_group/report_en.pdf
  • Lobanova, O., Hamid, S. S., & Prakash, A. J. (2010). The Impact of Short-Sale Restrictions on Volatility, Liquidity and Market Efficiency:...
  • McKenzie, M. D. (2012). Should Short Selling Be Banned During Periods of Market Turmoil? JASSA 2, 8-13.
  • Miller, E. M. (1977). Risk, Uncertainty, and Divergence of Opinion. The Journal of Finance 32(4), 1151-1168. https://doi.org/10.1111/j.1540-6261.1977.tb03317.x
  • Moloney, N. (2014). EU Securities and Financial Markets Regulation. Oxford University Press.
  • Moon, C.-G., & Stotsky, J. G. (1993). The Effect of Rent Control on Housing Quality Change: A Longitudinal Analysis. Journal of Political...
  • Quaglia, L. (2007). The Politics of Financial Services Regulation and Supervision Reform in the European Union. European Journal of Political...
  • Reed, A. V. (2002). Costly Short-Selling and Stock Price Adjustment to Earnings Announcements. Dissertations available from ProQuest. AAI3073047....
  • Saastamoinen, J., & Suhonen, N. (2013). Were the European Short Selling Bans of 2011 Effective? Economics Bulletin 33(3), 1847-1851. Retrived...
  • Saffi, P. A. C., & Sigurdsson, K. (2011). Price Efficiency and Short Selling. The Review of Financial Studies 24(3), 821-852. https://doi.org/10.1093/rfs/hhq124
  • Securities and Exchange Commission (2008). SEC Halts Short Selling of Financial Stocks to Protect Investors and Markets. Retrived from http://www.sec.gov/news/press/2008/2008-211.htm
  • Setzu, A., & Marchesi, M. (2006). The Effects of Short-Selling and Margin Trading: A Simulation Analysis. University of Cagliari Working...
  • Vitali, S., Glattfelder, J. B., & Battiston, S. (2011). The Network of Global Corporate Control. PloS One 6(10). https://doi.org/10.1371/journal.pone.0025995
  • Werner, S. (2010). Short Selling Activities and Convertible Bond Arbitrage - Empirical Evidence from the New York Stock Exchange. Vol. 75....