Temporary ban on short positions and financial market volatility: evidence from the Madrid Stock Market

Abstract

This article analyses the effect of the introduction of temporary ban on short positions in the Spanish market on the volatility of both the closing price and the trading volume of the underlying index as well as on the price of the main financial institutions. Using an econometric procedure for detecting structural breaks in the series, we study the period January 2000–December 2013. Our results do not suggest any significant impact on variance, neither on price nor on trade volume.

Keywords:

• short-selling ban
• structural breaks
• GARCH model

JEL Classification:

• G18
• C22
• C59

Acknowledgements

The authors wish to thank Jushan Bai and Pierre Perron for kindly providing us with the GAUSS code for computations of their tests to detect multiple structural breaks and Bolsas y Mercados Españoles for kindly providing us with the database used in this article.

Notes

¹ Similarly, Stock and Watson (2002) use the absolute value of the fitted residuals of a VAR model to analyse changes in variance. Alternatively, Valentinyi-Endrész (2004) use the squared errors from a AR(1)-GARCH(1,1) model to compute changes in variance.

² For further analysis see Bai and Perron (1998, 2003).

³ Additional formal tests to assess the equality variance before and after the introduction of the bans suggest that they are not significantly different.

Additional information

Funding

The authors gratefully acknowledge financial support from the Spanish Ministry of Economy and Competitiveness [project ECO2011-23189].