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Volume 66, Issue 4

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Did Investors Seeking Short Exposure Move to the CDS Market after the 2011 Short-Sale Bans in European Financial Stocks?

Pereira da Silva, Paulo

Year: 2016   Volume: 66   Issue: 4   Pages: 322-353

Abstract: This paper addresses the effects that the August 2011 ban on covered short selling has had on the trading behavior of credit default swap (CDS) contracts. Overall, the results obtained suggest that CDS protection buying is not viewed by investors as a viable substitute for taking short interest in stocks. An initial analysis demonstrates that the CDS open interest of firms included in the ban lists actually declined after the ban. There is also no evidence of price pressure on CDSs written on firms on the ban lists. Surprisingly, CDSs on European financial firms and, in particular, on firms subject to the ban saw a decline in volatility after the ban. CDS bid-ask spreads evolved positively after the ban, but that increase was economically modest. Finally, there is evidence that the ability of CDS spreads to predict stock prices fell with the ban, which is inconsistent with the migration of informed traders to the CDS markets.

JEL classification: G14; G18

Keywords: short-selling ban, credit default swap, information flow

RePEc: http://ideas.repec.org/a/fau/fauart/v66y2016i4p322-353.html

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