Wednesday, 7 January 2009

Just a bit more on shorting

Hat-tip to Charlie for highlighting this paper (PDF) which appeared last year which focuses on the impact of restrictions on shorting. I've had a very quick skim, and it looks right up my street. The broad message is that the shorting bans haven't made any difference, here are the main conclusions:
Our main findings can be summarised as follows:

1. We find no strong evidence that the imposition of restrictions on short selling in the UK or elsewhere changed the behaviour of stock returns. Stocks subject to the restrictions behave very similarly both to how they behaved before the imposition of restrictions and to how stocks not subject to the restrictions behave.

2. Further, comparing behaviour across countries where the nature of the restrictions differs, we fail to find systematic patterns consistent with the expected effect of the new regulations.

3. We also find no sign of the expected detrimental impact of constraints. Autocorrelation coefficients and goodness of fit statistics are if anything slightly lower in the post‐restrictions period.

4. Regression analysis suggests that any change in the key statistics is mainly driven by sector‐ wide influences than the restrictions on short selling. That is, some systematic changes in the behaviour of financial sector stocks could be discerned but no strong evidence of a systematic impact of the restrictions could be identified.

The main thing to draw from this seems to be that the regulators' interevention was a bit of a waste of time. But point 3 is worth considering too, since this would seem to undermine one of the arguments in favour of shorting. The short preamble to the report is also worth a read, as it sets out some of the academic views on what the effect of a shorting band would be.

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