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The effect of short selling bans on UK stocks in relation to market metrics of volatility, liquidity, and price discovery

The effect of short selling bans on UK stocks in relation to market metrics of volatility, liquidity, and price discovery

Patel, Harihar and Guidi, Francesco ORCID: 0000-0002-2682-189X (2020) The effect of short selling bans on UK stocks in relation to market metrics of volatility, liquidity, and price discovery. [Working Paper] (Unpublished)

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Abstract

In this study we look at the relationship between liquidity, volatility, and price discovery with short selling on UK stocks. We use the UK financial stocks short sale ban of the 2007-2009 financial crisis to explore the effects of short selling on liquidity, volatility and price discovery. We employ a control portfolio as well to see the effects of the short sale ban. We employ a GARCH model to explore the effects of short selling on volatility. Using this model, we find that volatility is not affected during the short sale ban, this in turn questions the significance of short sale bans. We employ a Bid-Ask Spread Model to explore the effects of short selling on liquidity. We find that the Bid-Ask Spread Model shows that liquidity deteriorates during the short sale ban period. Lastly, we employ a Wald-Wolfowitz Runs Test to see fat tails in its distribution, this shows the effects of price discovery on a short sale ban. We find that price discovery deteriorates during the short sale ban period.

Item Type: Working Paper
Uncontrolled Keywords: short selling, financial crisis, portfolio
Subjects: H Social Sciences > HG Finance
Faculty / Department / Research Group: Faculty of Business
Faculty of Business > Department of International Business & Economics
Last Modified: 18 Feb 2021 11:08
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
Selected for GREAT 2019: None
Selected for REF2021: None
URI: http://gala.gre.ac.uk/id/eprint/30702

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