Price Inflation and Wealth Transfer During the 2008 SEC Short-Sale Ban

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Abstract
Using a factor-analytic model that extracts common valuation information from the prices of stocks that were not banned, we estimate that the ban on short-selling financial stocks imposed by the SEC in September 2008 led to substantial price inflation in the banned stocks. The inflation reversed somewhat following the ban, but the data are too noisy to conclusively link the reversal to the ban. Other factors such as the pending TARP legislation may also have affected prices, though our results suggest that it was not a significant factor. If prices were inflated, buyers paid more than they otherwise would have paid for the banned stocks during the period of the ban. We provide an estimate of $4.9 billion for the resulting wealth transfer from buyers to sellers. Such transfers should interest policymakers concerned about maintaining fair markets.

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