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Testing the effects of short-selling constraints in Europe using GARCH models

Uhd Jepsen, Kasper LU and Karlsson, Anna Sofia Louise LU (2018) NEKN02 20181
Department of Economics
Abstract
By betting on market downturns, short sellers make profits from asset declines. Thus, critics often blame short sellers for being responsible for market downturns and as a consequence, short selling restrictions became a popular phenomenon worldwide post the 2008 financial crisis. During the European sovereign debt crisis regulators in France, Belgium, Spain and Italy imposed a short selling bans for financial stocks in order to prevent further market downturns. The ban, with the purpose of reducing market volatility and the effect of false rumours, was active between August 2011 and February 2012. This paper studies the impact on market volatility from this short selling ban and attempts to ascertain whether or not it achieved its... (More)
By betting on market downturns, short sellers make profits from asset declines. Thus, critics often blame short sellers for being responsible for market downturns and as a consequence, short selling restrictions became a popular phenomenon worldwide post the 2008 financial crisis. During the European sovereign debt crisis regulators in France, Belgium, Spain and Italy imposed a short selling bans for financial stocks in order to prevent further market downturns. The ban, with the purpose of reducing market volatility and the effect of false rumours, was active between August 2011 and February 2012. This paper studies the impact on market volatility from this short selling ban and attempts to ascertain whether or not it achieved its objective. In order to test for the stock market volatility in the four European countries where the ban was imposed, we use a variety of Generalised Autoregressive Conditional Heteroskedasticity (GARCH) models. We apply these models to portfolios of stocks that were subject to a short selling ban, as well as to portfolios of stocks that were not. We find some evidence of an increase in the volatility of returns for stocks on which short selling was not banned and attempt to explain why this is the case. (Less)
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author
Uhd Jepsen, Kasper LU and Karlsson, Anna Sofia Louise LU
supervisor
organization
course
NEKN02 20181
year
type
H1 - Master's Degree (One Year)
subject
keywords
GARCH, Short selling, short sale restrictions, EGARCH, volatility
language
English
id
8948729
date added to LUP
2018-07-02 15:40:17
date last changed
2018-07-02 15:40:17
@misc{8948729,
  abstract     = {By betting on market downturns, short sellers make profits from asset declines. Thus, critics often blame short sellers for being responsible for market downturns and as a consequence, short selling restrictions became a popular phenomenon worldwide post the 2008 financial crisis. During the European sovereign debt crisis regulators in France, Belgium, Spain and Italy imposed a short selling bans for financial stocks in order to prevent further market downturns. The ban, with the purpose of reducing market volatility and the effect of false rumours, was active between August 2011 and February 2012. This paper studies the impact on market volatility from this short selling ban and attempts to ascertain whether or not it achieved its objective. In order to test for the stock market volatility in the four European countries where the ban was imposed, we use a variety of Generalised Autoregressive Conditional Heteroskedasticity (GARCH) models. We apply these models to portfolios of stocks that were subject to a short selling ban, as well as to portfolios of stocks that were not. We find some evidence of an increase in the volatility of returns for stocks on which short selling was not banned and attempt to explain why this is the case.},
  author       = {Uhd Jepsen, Kasper and Karlsson, Anna Sofia Louise},
  keyword      = {GARCH,Short selling,short sale restrictions,EGARCH,volatility},
  language     = {eng},
  note         = {Student Paper},
  title        = {Testing the effects of short-selling constraints in Europe using GARCH models},
  year         = {2018},
}