EDHEC Position Paper Lists Negative Consequences of Short Selling Ban
A study of short selling activities by EDHEC finance professor Abraham Lioui, entitled ‘The Undesirable Effects of Banning Short Sales’, calls into question both the reasons for the decision to ban short selling and the prejudices that weigh on those who short. The consequences of the ban, as noted in the EDHEC position paper, include:
According to recently published data (for the US in particular), a large majority of short sellers are market makers who are hedging their bets on the options markets. They were not affected by the ban, which means that those who were using options to take synthetic short positions continued to do so. The others involved in short selling are mainly hedge funds. The average return over the last 10 years for hedge funds that used short sale, convertible arbitrage and long/ short strategies was 3%, 4.75% and 7% respectively. One can hardly argue that they were over-informed and that they earned abnormal returns.
In brief, the EDHEC argues that short sellers perhaps did not really merit the punishment that, by simply banning the shorting of the shares of financial institutions, the market authorities recently meted out. The EDHEC study confirms that the shares that were the object of the ban were relatively unaffected by it.