Karmaziene, E. and Sokolovski, V. (2022). Short Selling Equity Exchange Traded Funds and Its Effect on Stock Market Liquidity Journal of Financial and Quantitative Analysis, 57(3):923--956.
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Affiliated author
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Publication year2022
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JournalJournal of Financial and Quantitative Analysis
We examine short selling of equity exchange traded funds (ETFs) using the 2008 short-sale ban. Contrasting the previously documented contractions in bearish strategies during the ban, we find a significant increase in short sales of the largest, most liquid ETF, the S\&P 500 Spider. We offer evidence suggesting this upsurge was driven primarily by investors circumventing the ban. We show that the ban{\textquoteright}s detrimental effect on stock liquidity was around 30% less severe for the Spider{\textquoteright}s constituents. Our results suggest that ETF shorts can substitute for short sales of individual stocks, thereby alleviating short-sale constraints{\textquoteright} adverse effect on liquidity.