The Impact of Short Sale Restrictions on Stock Volatility : Evidence from Taiwan

Governments implement policies to stabilize stock markets in times of financial crisis. The most common intervention is to forbid short sales. For instance, around the financial crisis of 2008, eleven governments announced restrictions on naked short sales in their stock markets. In light of the Greek credit crisis in 2010, Germany also disallowed naked short sales. Opinions were widely divided regarding the appropriateness of government to interfere in markets. This paper studies the influence of volatility asymmetries caused by the Taiwanese government's naked short sale restrictions. Intraday data is used to analyze the issue by way of EGARCH models. We find the high liquidity associated with large stocks increases asymmetric volatility. However, asymmetric volatility of middle and small sized stocks decreases around the naked short sale ban