2008 SEC short selling ban: impacts on the credit default swap market

Courtney, Samuel (2010): 2008 SEC short selling ban: impacts on the credit default swap market.

Abstract

On September 17, 2008, the Securities and Exchange Commission (SEC) issued an emergency order banning the shorting of 797 financial stocks. This paper studies the impact of the short selling ban on the credit derivatives market by investigating credit default swap (CDS) prices during the period that the ban was in effect. The hypothesis is proposed that the short selling ban on 797 financial stocks led market participants to enter CDS contracts to reflect positions that the participants had formerly entered through short sales, thus driving up CDS rates. Analysis compares the CDS prices of firms protected by the ban to the CDS prices of similar firms in the S&P 500 not covered by the ban. Tests are also conducted using metrics from the bond and equities markets to determine if the results from the CDS market are unique to the CDS space. A linear regression technique is used to test the significance of the ban on CDS prices. The study results indicate that the CDS prices of firms covered by the short selling restrictions experienced significant dislocations during the period of the ban.

• Item Type: MPRA Paper
• Language: English
• Keywords: SEC short selling ban; credit default swaps; credit derivatives
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation; G - Financial Economics > G1 - General Financial Markets > G10 - General; G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G2 - Financial Institutions and Services > G20 - General

References

Abid, F. and N. Naifar. 2006. “The Determinants of Credit Default Swap Rates: An Explanatory Study,” International Journal of Theoretical and Applied Finance, 9(1): pp. 23-42.

Amato, J.D. 2005. “Risk Aversion and Risk Premia in the CDS Market,” BIS Quarterly Review, December pp. 55-68.

Boehmer, E., C.M. Jones, and X. Zhang. 2008. “Shackling Short Sellers: The 2008 Shorting Ban,” Texas A&M University, Columbia Business School, Cornell University. Working Paper, November.

Byström, Hans. 2008. “Credit Default Swaps and Equity Prices: The iTraxx CDS Index Market,” in N. Wagner, eds., Credit Risk Models, Derivatives, and Management. CRC Press, pp. 69-84.

"Charlie Rose Interviews Jim Chanos." The Charlie Rose Show. PBS. 12 Apr. 2010. Television.

Claes, A. and M. De Ceuster. 2008. “Single Name Credit Default Swap Valuation: A Review,” in N. Wagner, eds., Credit Risk Models, Derivatives, and Management. CRC Press, pp. 69-84.

Cossin, D. and T. Hricko. 2001. “Exploring of Credit Risk in Credit Default Swap Transaction Data,” HEC Lausanne. Working Paper, May.

Hull, J., M. Predescu, and A. White. 2004. “The Relationship between Credit Default Swap Spreads, Bond Yields, and Credit Rating Announcements,” Journal of Banking & Finance, November 28(11): pp. 2789-2811.

Longstaff, F.A., S. Mithal, E. Neis. 2003. “The Credit-Default Swap Market: Is Credit Protection Priced Correctly?,” NBER. Working Paper, August.

Sougné, D., C. Heuchenne, and G. Hübner. 2008. “The Determinants of Credit Default Swap Prices: An Industry-Based Investigation,” in N. Wagner, eds., Credit Risk Models, Derivatives, and Management. CRC Press, pp. 85-96.

Younglai, Rachelle. "SEC Chief Has Regrets Over Short-Selling Ban." Reuters. 31 Dec. 2008.