On 1 March 2022 ESMA issued a market impact analysis on short selling bans.
- ESMA issued a market impact assessment of the 2020 short selling bans in the EU.
- Follows ESMA May 2020 noted non-renewal of national short-sale bans.
- The severe market stress of March 2020 pushed six European authorities to impose short selling bans in a coordinated way with the aim of limiting downward price spirals.
- Restrictions at the height of Covid-19 related market stress allow the academic question of the effects of short selling bans on market liquidity to be revisited.
- Estimation relies on difference-in-difference regression and matching techniques.
- Consistent with prior theoretical and empirical work, short selling bans are associated with a liquidity deterioration, measured by significantly higher bid–ask spreads (+7.5% of bid–ask spreads for stocks in banned jurisdictions during restriction, compared to the control group) and Amihud illiquidity values (between +2.2% and 4.8%).
- However, using two different measures of volatility, the analysis highlights that shares in banned countries exhibited a lower degree of volatility during the ban period.
- Distinguishing by stock characteristics, the deterioration of liquidity appears more pronounced for large-cap stocks, highly fragmented stocks, and stocks with listed derivatives - pointing towards stronger effects for shares deemed as liquid.
- Econometric analysis undertaken didn't identify statistically significant correlation with abnormal returns, suggesting that bans did neither harm nor sustain market prices.
- Finally, according to an analysis of net short positions data across jurisdictions, bans did not entail substantial displacement effects from non-banning to banning jurisdictions.