Short Sale Restrictions (Management Project)

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Background: In times of financial crisis short selling is often quickly blamed for price volatility and media broadcasts pleads for prohibitions and restrictions. Extensive research, however, cannot find any empirical evidence that shorting is affecting markets negatively; often it is the other way around.

Sweden has been relatively liberal when it comes to shorting restrictions and even though share lending has increased since the start of the year, no actions have been taken by the Swedish Financial Supervisory Board.

Problem: Is there a correlation between the number of shorted shares and the change in overall and individual stock price? What actions have been taken by countries in Europe, Asia and the United States regarding short selling during the fall of 2008 and what is SFSB’s attitude towards the subject? Are there any benefits for the Swedish financial market from shorting regulations?

Purpose: With background of other countries’ actions, the purpose of this report is to investigate why, if at all, short sale regulations should be introduced on the Swedish financial market. Method: The analysis have been drawn from four cornerstones; previous research, actions of other countries’, a statistical analysis and interview findings.

We have examined and compiled different strategies for restricting short sales around the world as well as conducted a cross-correlation analysis to investigate if share price is related to stock loan. Furthermore we have interviewed a professional investor and a middle manager at the Swedish Financial Supervisory Board to obtain experts’ views on the subject.

Conclusion: Based on our findings we do not advocate short sale regulations to be introduced on the Swedish financial market. Neither does our analysis indicate that the market performance is significantly affected by shorting, nor does restrictions work as intended which we have seen in other countries during the fall of 2008.
Source: Jönköping University
Authors: Bodestedt, Fredrik | Andersson, William | Hjortsjö, Carl

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