Paper: arXiv 2609.08881

Authors: Pasquale Della Corte, Robert Kosowski, Dimitris Papadimitriou, Nikolaos P. Rapanos

Abstract

We develop a theoretical model that endogenizes the regulator’s decision to impose short-selling bans to prevent large stock price declines. Empirically, we test the model’s predictions using the cross-sectional variation in short-selling restrictions implemented across European countries in 2020. Consistent with our model, we find that bans had a detrimental effect on liquidity and failed to support the average price levels, but were effective in limiting large price drawdowns. Finally, we show that the effectiveness of the bans depends on the share of informed stockholders, a central variable in our framework, thus informing the design of more effective regulatory responses.

Complexity vs Empirical Score

  • Math Complexity: 7.0/10
  • Empirical Rigor: 8.0/10
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: This paper presents a strong theoretical model with rigorous empirical validation using a quasi-natural experiment. The findings offer novel insights into the nuanced effects of short-selling bans, making it a significant contribution to the literature.

Research Flowchart

  flowchart TD
    A[Research Goal: Evaluate Short-Selling Bans' Efficacy] --> B{Theoretical Model Development};
    B --> C[Data: European Short-Selling Restrictions (2020)];
    C --> D{Empirical Testing & Analysis};
    D --> E[Finding 1: Bans Harmed Liquidity & Didn't Support Avg. Prices];
    D --> F[Finding 2: Bans Limited Large Price Drawdowns];
    D --> G[Finding 3: Effectiveness Depends on Informed Stockholders];