EDHEC-risk institute (EDHEC) has condemned the 11 August decision by the financial market authorities in Belgium, France, Italy and Spain to impose or extend short-selling bans in the wake of renewed market volatility.
According to EDHEC, these hasty decisions are not only devoid of theoretical basis, but also fly in the face of empirical evidence. Academic studies, including work by EDHEC researchers, have documented the positive contribution of short-sellers to market efficiency and shown that constraining short sales significantly reduces market quality – by reducing liquidity and increasing volatility – and can have unintended spillover effects.
In a series of research articles, EDHEC business school professor Ekkehart Boehmer and his co-authors have studied short selling activities, looking at the type of information possessed by short-sellers, at the impact between short selling activities and abnormal returns, and at the link between short-selling and the price discovery process. They established that short sellers are important contributors to efficient stock prices, that short interest contains valuable information for the market, that information is impounded faster and more efficiently into prices when short sellers are more active and that short sellers change their trading around extreme return events in a way that aids price discovery.
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