Short selling contraints and stock returns volatility: empirical evidence from the German stock market
Bohl Martin T., Reher Gerrit, Wilfling Bernd
In this paper, we focus on the impact of short selling restrictions on stock returns volatility. In order to assess the potential effects econometrically, we apply two distinct versions of an asymmetric Markov-switching GARCH model to the short selling bans on stocks of financial enterprises in Germany, that were established between September 2008 and July 2010. We find empirical evidence that the financial crisis was accompanied by an increase in volatility persistence and that this effect was particularly pronounced for those stocks that were subject to short selling constraints. We interpret this finding as evidence of a destabilizing impact of short selling constraints on stock returns volatility.
Financial market regulation; short selling constraints; stock returns volatility; Markov-switching GARCH models