Short-selling bans and institutional investors' herding behaviour: Evidence from the global financial crisis |
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Institution: | 1. Department of Economics, Westfälische Wilhelms-University Münster, Am Stadtgraben 9, 48143 Münster, Germany;2. School of Business & Economics, Wilfrid Laurier University and Viessmann European Research Centre, 75 University Avenue West, Waterloo, Ontario, N2L 3C5, Canada;1. Department of Economics, University of Münster, Am Stadtgraben 9, 48143 Münster, Germany;2. Finance Center Münster, University of Münster, Universitätsstrasse 14-16, 48143 Münster, Germany |
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Abstract: | The literature on short-selling restrictions focusses mainly on a ban's impact on market efficiency, liquidity and overpricing. Surprisingly, little is known about the effects of short-sale constraints on herd behaviour. Since institutional investors have come to dominate mature stock markets and rely extensively on short sales, constraining these traders may influence the asset pricing process. We investigate six stock markets that faced bans during the recent global financial crisis. Our empirical evidence shows that short-selling restrictions exhibit either no influence on herding formation or induce adverse herding. This implies a higher dispersion of returns around the market compared to rational asset pricing, which can be interpreted as an increase in uncertainty among stock market investors. |
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