Have COVID-19 Motivated Short Sale Bans Impoved Market Quality? An Event Study on the French Equity Market

Abstract

This thesis assesses the impact of COVID-19 motivated short sale bans (SSBs) on market quality. Specifically, a statistical analysis of mean difference between the French stock index CAC and its German counterpart DAX is performed. Both inter-market and inter-temporal tests are conducted to accurately capture both the absolute and relative developments of the two markets. Performing the tests on a pair of highly similar economies, as the French and German economy is argued to be, provides a higher level of control than has been achieved by previous literature when broadly assessing deviations across multimarket groups of ban and no-ban countries. Additionally, the study accounts for the effect of COVID-19 cases per capita. Four measures of market quality are identified and tested for both markets: Volatility, as defined as the 30-day exponentially moving average of log-daily returns, Relative Bid-ask spreads, Trading volumes, and Amihud’s (2002) illiquidity measure. The thesis finds strong evidence to support that the COVID-19 motivated SSB imposed in France resulted in a deterioration of market quality as Volume significantly decreased and Volatility, as well as Relative Bid-ask spreads, increased significantly, although Relative Bid-ask spreads remained smaller for CAC than DAX across the period of the ban. Lastly, the SSB is found to have had an insignificant impact on Illiquidity. It is subsequently argued that there is no evidence to suggest that SSBs from a financial perspective improve market quality. The findings of this empirical analysis are subsequently in line with the expectations from theory, which argues that SSBs do not provide improved market quality