Authors

• Óscar Arce (o.arce@bde.es)
  Directorate General Economics, Statistics and Research, Bank of Spain
• Sergio Mayordomo (smayordomo@unav.es)
  School of Economics and Business Administration, University of Navarra

Abstract
This paper studies the main effects of the short sales ban implemented in August 2011 in the Spanish stock market along two dimensions: financial stability and market performance. Regarding the first, we show that short positions were a significant determinant of the probability of default of medium-sized banks before the ban. We find that, by weakening the contagion effect coming from the sovereign risk, the ban helped stabilise the probability of default of medium-sized banks, an effect which is not significant in the case of the largest banks and non-financials. Nonetheless, the stabilising power of the ban came at the cost of a large decline in the relative liquidity, trading volumes and price information efficiency of medium-sized banks stocks.

Classification JEL:G01, G12, G14, G18

Keywords:Short-sales constraints, financial stability, financial institutions, credit default swap, contagion

Number of Pages:46

Creation Date:2012-12-21

Number:null/12