Short Sale Ban as Protection from Market Crash: Evidence from the European Union

Abstract

Europe was divided in the spring of 2020: one part introduced a ban on short sales, while the other did not. Applying difference-in-difference methodology, I use this natural experiment to show that the imposition of the short sale ban positively affected stock returns in the countries in question, but that it was detrimental to market volume and liquidity, with no effect on volatility. Placebo tests confirm the validity of the results. The removal of the short sale ban led to a positive effect on returns in the countries where the ban was lifted, volume decreased, and liquidity and volatility improved.