Financial Crisis and Short Selling : Do Regulatory Bans Really Work? Evidence from the Italian Market

The global financial crisis and its effect on stock market volatility seems persuaded the market regulators how destabilising short-selling can be and how it contributes to undermine market's confidence. Following the decisions of other market regulators, the Italian securities exchange commission (Consob) decided to prohibit the operations of short selling for the domestic trading since the 23th of September 2008, recognizing greater severity to those operations where banks and insurance companies stocks are underlying. The aim of this paper is investigate the impact on volatility and performance for those stocks subject to these restrictions. By analyzing the effect on daily price returns and volatility following the addition of short selling constrains, and using some control procedure able to isolate them from possible crisis induced movements, our results do not indicate a common impact of the restrictions. While the results on the performance change show some difference in the trend of mean performance before and after the short selling constraint that is particularly relevant for those stock without traded options, the results concerning the volatility impact show a general increase of the post-restriction variance the most part of which can be attributable to the short selling bans. This finding appear contrary to the basic belief of market regulators to consider short selling ban as an useful tool able to mitigate volatility and speculative behaviors; new restrictions on short sellers are likely to reduce the amount of information incorporated into stock prices