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No Negativity Allowed During Uncertain Periods! A Comparison of short sale restriction during the Eurozone crisis and Covid-19 Pandemic

Löveråsen, Axel LU and Tyrsing, Erik (2022) NEKP01 20221
Department of Economics
Abstract
During uncertain periods, regulators have been known to restrict the ability to short sell in markets. The stated reason is to help calm the markets and to reduce the volatility. The purpose of this paper is to examine if this stated goal was achieved by the regulators during the Eurozone crisis and the Covid-19 Pandemic, as well as comparing the impact on volatility for these two periods. This is done using a Difference in Difference estimator, with two approaches. Where the first one examines the volatility on an index level, while the second one examines the volatility solely for stocks in the financial sector. The results indicate that the Treatment effect, i.e. the short selling restriction, is significant and positive for all... (More)
During uncertain periods, regulators have been known to restrict the ability to short sell in markets. The stated reason is to help calm the markets and to reduce the volatility. The purpose of this paper is to examine if this stated goal was achieved by the regulators during the Eurozone crisis and the Covid-19 Pandemic, as well as comparing the impact on volatility for these two periods. This is done using a Difference in Difference estimator, with two approaches. Where the first one examines the volatility on an index level, while the second one examines the volatility solely for stocks in the financial sector. The results indicate that the Treatment effect, i.e. the short selling restriction, is significant and positive for all approaches except for the Index Approach during the Eurozone crisis. This implies that the restriction increased the volatility during these uncertain periods, instead of decreasing it. Therefore we argue, in line with previous literature, that a short selling ban should not be used to try and calm down the markets. (Less)
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author
Löveråsen, Axel LU and Tyrsing, Erik
supervisor
organization
course
NEKP01 20221
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Short selling, Eurozone crisis, Covid-19 Pandemic, Volatility, Difference-in-Differences
language
English
id
9091350
date added to LUP
2022-10-10 11:28:56
date last changed
2022-10-10 11:28:56
@misc{9091350,
  abstract     = {{During uncertain periods, regulators have been known to restrict the ability to short sell in markets. The stated reason is to help calm the markets and to reduce the volatility. The purpose of this paper is to examine if this stated goal was achieved by the regulators during the Eurozone crisis and the Covid-19 Pandemic, as well as comparing the impact on volatility for these two periods. This is done using a Difference in Difference estimator, with two approaches. Where the first one examines the volatility on an index level, while the second one examines the volatility solely for stocks in the financial sector. The results indicate that the Treatment effect, i.e. the short selling restriction, is significant and positive for all approaches except for the Index Approach during the Eurozone crisis. This implies that the restriction increased the volatility during these uncertain periods, instead of decreasing it. Therefore we argue, in line with previous literature, that a short selling ban should not be used to try and calm down the markets.}},
  author       = {{Löveråsen, Axel and Tyrsing, Erik}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{No Negativity Allowed During Uncertain Periods! A Comparison of short sale restriction during the Eurozone crisis and Covid-19 Pandemic}},
  year         = {{2022}},
}