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Short sale ban did not ease downward pressure in financial markets

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The 2008 ban on short sales did not relieve the downward pressure on stock prices, according to a position paper by Abraham Lioui, professor of finance at Edhec Business School.

The study found that the ban leads to a considerable increase in the dispersion of investor opinions and this dispersion, in turn, leads to great increases in the volatility of stocks and indices.

This effect is evident even when such events as the Lehman Brothers bankruptcy and the longstanding sub-prime crisis are controlled for.

The study says short selling does not migrate to the derivatives markets; the sustained fall of prices is, instead, the result of long traders exiting the market.

The market does not seem to believe that short sellers or the hedge fund industry were responsible for the turmoil of 2008, the paper concludes.

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