Short-Selling Bans and Contagion Risk

Starting in September 2008, market regulators from stock markets across the world have introduced, at different points in time and for different periods of length, a ban on short-selling financial institution's shares. The argument for the bans is that short-selling increases the volatility and contagion risk of financial institutions. This paper uses Extreme Value Theory to calculate univariate and contagion risk across financial institutions, and the effect of short-selling on those risks in banks in Belgium, France, Italy and Spain. We find that changes in these downside risk metrics are positively related with changes in short-selling positions