ESMA publishes “The 2020 short selling bans – market impact”

The severe market stress of March 2020 pushed six European authorities to impose short selling bans in a coordinated way with the aim of limiting downward price spirals. These restrictions at the height the Covid-19 related market stress allow the academic question of the effects of short selling bans on market liquidity to be revisited. Our estimation relies on a difference-in-difference regression combined with matching techniques. Consistent with prior theoretical and empirical work, these short selling bans are associated with a liquidity deterioration, measured by significantly higher bid–ask spreads (+ 7.5 % of bid–ask spreads for stocks in banned jurisdictions during the restriction, compared to the control group) and Amihud illiquidity values (between + 2.2 % and 4.8 %). However, using two different measures of volatility, the analysis highlights that shares in banned countries exhibited a lower degree of volatility during the ban period. Distinguishing by stock characteristics, the deterioration of liquidity appears more pronounced for large-cap stocks, highly fragmented stocks and stocks with listed derivatives – pointing towards stronger effects for shares deemed as liquid. The econometric analysis undertaken did not identify any statistically significant correlation with abnormal returns, suggesting that the bans did neither harm nor sustain market prices. Finally, according to the analysis of net short positions data across European jurisdictions, the bans did not entail substantial displacement effects from non-banning to banning jurisdictions.

The full report is available at

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