What is it good for, absolutely nothing? The European short-selling restriction and the effects on volatility during the Covid-19 pandemic

Sammanfattning: The aim of this study is to examine if the stated reason for the implementation of the short-selling restrictions by regulators during the Covid-19 crisis actually achieved a decrease in volatility. This study has its theoretical foundation in the role of short-sellers in equity markets. With the aim to investigate the effect that restricting short-selling have on volatility. The sample consists of stock and index data from six European countries. The time period of interest is the 18th of September 2019 until the 18th of May 2020. This way there is a pre- and post-restriction period whereas a Difference-in-Difference estimator is applicable. The quantitative methodological design includes three different approaches. Whereas, one is examining the volatility on an index-level. The second one, is a decomposed index approach where we include all individual stocks on each major index. Finally, in the third one we solely examine the stocks in the financial sector. We conclude that all three approaches exhibit analogous results, since the δ-variable that represents the restriction effect, is a positive coefficient. Moreover, the δvariable is significant in all base models and in all modified regressions, except for the index approach. This implies, that the implementation of the short-selling restriction increased market volatility. Hence, in line with previous studies, we argue that an implementation of short-selling restrictions is not recommended if the stated purpose of it refers to a reduction of volatility. Moreover, our findings indicate that other financial government interactions rather than just short-selling restrictions are affecting market volatility.