NEWS

Abraham Lioui, Professor of Finance at the EDHEC Business School,, shows (“Spillover Effects of Counter-cyclical Market Regulation: Evidence from the 2008 Ban on Short Sales,” March 2010) that bans on short selling “were responsible for a substantial increase in market volatility.” Further, “the ban did not ease the downward pressure in the financial markets. The market seems not to believe that short sellers or the hedge fund industry were responsible for the turmoil of 2008.”

The volatility occurred, Lioui wrote, because “the ban led to a considerable increase in the dispersion of investor opinions and this dispersion, in turn, led to great increases in the volatility of stocks and indices. This effect is evident even when such events as the Lehman Brothers bankruptcy and the long-standing subprime crisis are controlled for.”

In an article in the Financial Times ( “Don’t be Fooled by SEC’s Short Sales Check,” April 25, 2010), Professor Lioui questioned the SEC’s circuit breaker on short sales. “The SEC appears unwilling to learn even from recent experiences (July/August and September/October 2008). Markets clearly disapproved of the September 2008 shorting ban: short sellers were kept out of the markets but prices went on falling, as long holders sold their stocks.”