Shorting common sense

I've previously noted that the policy of banning short-selling looked just like the sort of hunch driven regulation that hurts both the economy and common sense. Its prohibition of speculation on price falls was Canute-like.

Now here's some strong evidence that bans such as ASIC's had adverse impacts on precisely factor most needed in a crisis of market confidence: liquidity.

"The evidence suggests that the knee-jerk reaction of most stock exchange regulators around the globe to the financial crisis – imposing bans or regulatory constraints on short-selling – was at best neutral in its effects on stock prices. The impact on market liquidity was clearly detrimental, especially for small-cap and high-risk stocks. Moreover, it slowed down price discovery" Extract from Short-selling bans in the crisis: Alessandro Beber and Marco Pagano

Tags for this entry: evidence investment financial crisis