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The analysis of short-selling restrictions in emerging equity markets
Spreading of COVID-19 threatened the financial stability world-wide and led to introduction of short-selling restrictions in equity markets. Both developed and emerging markets tried to protect investors with such measures, aiming to support price level and prevent market panic. In the modern literature there is no unequivocal opinion about the effect of short-selling restrictions on equity markets, moreover, most of the literature focuses on the USA and Europe, paying no attention to the developing equity markets. For the first time in the literature the paper examines the effect of short-selling restrictions in emerging markets. In the paper the analysis of restrictions on stock returns, volume of trade, liquidity, volatility, and market risk-metrics (Value-at-Risk and Expected Shortfall) is carried out. The study covers the period of financial turmoil of 2020, caused by spreading of COVID-19. The study is carried out separately for the two most popular restriction types: short-selling ban and uptick rule, which allows to compare these two policies. It turns out that both short-selling ban and uptick rule have the same effect on equity markets in terms of size and significance of the effect. With a matched difference-in-difference framework the study finds that introduction of short selling restrictions leads to an increase in daily and weekly stock returns with no change in volume of trade or liquidity. On the contrary to previous studies the volatility of stock returns decreases, leaving market risk measures (Value-at-Risk and Expected Shortfall) unchanged. The results are validated by several robustness checks: placebo tests, changes of matching schemes. The results of the study may help equity market regulators to understand the outcome of short selling restrictions on stock market and influence their decisions upon the type and duration of short-sale restrictions.