Spillover Effects of Counter-Cyclical Market Regulation: Evidence from the 2008 Ban on Short Sales

Abstract

In this article the author looks at the impact of the ban on broad market indices in the U.S. and in Europe (the United Kingdom, France, and Germany). Since these indices and their performance are of great concern to the asset management and hedge fund industries, it is important for practitioners and policy makers to understand the impact of changing the rules of the game (banning short sales) on the return distribution of these indices and to assess the potential spillover effects of a counter-cyclical regulation affecting only one segment of the financial market. He examines the ban on a broad range of market and strategy risk factors and shows that while the ban may be responsible for a substantial increase in market volatility, its impact on higher moments of index returns is not systematic (skewness and kurtosis of the return distribution of only a few indices were affected) or robust (using some robust measures of higher moments makes the impact of the ban disappear).