Short-Ban study finds no evidence of “expected effect of the new regulations”
Dec 18th, 2008 | Filed under: Hedge Fund Regulation, Today's Post
In September, we suggested that the recently imposed bans on short-selling certain stocks would provide academics with a field day as they examined whether such restrictions actually had the intended effects. We compared it to the situation immediately after 9/11 when climate researchers were afforded an opportunity to measure the effect of airplane contrails on ground surface temperatures in the United States.
Well the data is starting to roll in now. And according to a study published by the Cass Business School in London, our contrail analogy may have been a little off the mark. As Ian Marsh and Norman Niemer point out in “The Impact of Short Sales Restrictions“, it is virtually impossible to compare the performance of stocks during the ban with their previous performance histories. Dramatic market volatility that was coincident with the bans meant that the usual caveat “all else being equal” simply didn’t apply. This is like climatologists studying post-9/11 ground surface temperatures in the presence of a coincidental surge in sun-spot activity.
So instead of just comparing the statistical properties of pre-ban returns with those from the ban period, Marsh and Niemer also compare the statistical properties of the “restricted” stocks with those of the “unrestricted” stocks (summarized by us below as “A” and “B” respectively in the diagram below). More…
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