Short selling bans don’t influence herding, says CIGI
15 May 2013 Ontario
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The Centre for International Governance Innovation (CIGI) has released a publication detailing the effects of short-sale constraints on herd behaviour.
The publication examined bans on selected financial stocks in six countries during the 2008-2009 global financial crisis, which provided a setting to analyse the effect of short-sale restrictions.
“The literature on short-selling restrictions focusses mainly on a ban’s impact on market efficiency, liquidity and overpricing,” said authors Martin Bohl, Arne Klein and Pierre Siklos.
“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.”
The authors’ empirical evidence showed that short-selling restrictions exhibit either no influence on herding formation or induce adverse herding.
Addressing the case of stock market herding, Hwang and Salmon (2004) reveal a tendency of investors to reduce their herding or even to switch to adverse herd behaviour during periods of crisis, while regular herding is more likely to arise during calm times.
Seeking a theoretical explanation for these findings, Hwang and Salmon (2009) address swings in herding behaviour related to time-variations in market sentiment.
In particular, investors are prone to regular herding when they broadly agree about the stock market’s future performance, while adverse herd formation is the consequence of a high level of divergence of opinion among market participants.
The authors stated that they do not support the notion that herding among institutional investors was an important phenomenon during the global financial crisis.
“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.”
The Centre for International Governance Innovation (CIGI) is an independent, non-partisan think tank on international governance.
The publication examined bans on selected financial stocks in six countries during the 2008-2009 global financial crisis, which provided a setting to analyse the effect of short-sale restrictions.
“The literature on short-selling restrictions focusses mainly on a ban’s impact on market efficiency, liquidity and overpricing,” said authors Martin Bohl, Arne Klein and Pierre Siklos.
“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.”
The authors’ empirical evidence showed that short-selling restrictions exhibit either no influence on herding formation or induce adverse herding.
Addressing the case of stock market herding, Hwang and Salmon (2004) reveal a tendency of investors to reduce their herding or even to switch to adverse herd behaviour during periods of crisis, while regular herding is more likely to arise during calm times.
Seeking a theoretical explanation for these findings, Hwang and Salmon (2009) address swings in herding behaviour related to time-variations in market sentiment.
In particular, investors are prone to regular herding when they broadly agree about the stock market’s future performance, while adverse herd formation is the consequence of a high level of divergence of opinion among market participants.
The authors stated that they do not support the notion that herding among institutional investors was an important phenomenon during the global financial crisis.
“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.”
The Centre for International Governance Innovation (CIGI) is an independent, non-partisan think tank on international governance.
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