public-policy, finance, market-clearingAccording to the published academic research, what is the impact of recent short-selling bans on financial markets (shortly after the Lehman Failure or other periods of time)? In particular, do these bans have the intended effect of reducing downside volatility? Or do they reduce liquidity and have unintended consequences on capital markets?
Most models use rational expectations and as such can only deal with expected policy changes (or randomized policies). And from this ex ante perspective, allowing short-selling seems to be a good way of preventing bubbles. Indeed, models of rational asset bubbles usually require constraints on short selling. See for example this paper by Allen, Morris, and Postlewaite. It should be noted, however, that there are non-legal shortselling constraints, since short-sellers might (be forced to) default.
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