Investors love the 15-day ban on short-selling introduced by market authorities in Italy, Spain, Belgium and France: European stocks surged on Friday, with major indexes up about 3 per cent each.
Many observers, though, have expressed caution and even outrage over the move – and not because they have an overwhelming desire to see European banks get pummelled. The EDHEC-Risk Institute, which is part of one of Europe's leading business schools, issued a press release on Friday morning condemning the ban over concerns that it can actually increase market volatility.
"Academic studies, including work by EDHEC-Risk Institute researchers, have documented the positive contribution of short-sellers to market efficiency and shown that constraining short sales significantly reduces market quality – by reducing liquidity and increasing volatility – and can have unintended spillover effects," the release said.
Short interest, the authors argue, contains valuable information for the market. And that information flows into the market when short-sellers are active. As for the consequences of the previous ban on short-selling – that would be the widespread ban in 2008 after the collapse of Lehman Brothers – the results weren't good.
"The most recent study by [EDHEC Business School Professor Abraham] Lioui focused on the impact of the bans on leading market and financial indices in the U.S., France, the U.K. and Germany and found that these led to a systematic increase in the volatility of market indices and had an even stronger impact on financial indices," the release said. "None of the studies found indication that short-selling bans reduced downward pressure in a significant manner."
David Berman