Since 2008, a number of regulatory authorities have disallowed short sales, considering their negative impact on the market. The short selling ban in Korea lasted exceptionally longer than that of other major countries for both financial and non- financial stocks. This is surprising because Korea is one of countries whose markets were stabilized from the 2008 financial crisis relatively early and its market instability did not last long during the European financial crisis in 2011.
We analyze whether the short selling ban contributed the early market stabilization by controlling price depreciation and volatility in Korea or whether it negatively affected the stock market efficiency and quality by enforcing restriction on the stock market for an excessively long period of time.

Our paper differs from existing papers in the following senses. First, we analyze the effect of a short selling ban using the stock market order book, making it possible to use intraday prices and analyze the effect of a short selling ban using the spread, bid residuals, and order imbalances from the order book. Second, our research focuses not only on a time series analysis of the market quality before and after short selling, but also deals with cross-sectional analysis. Third, we evaluate the short selling ban and market efficiency of many leading countries.

We find the followings. First, short selling ban could not reduce market volatility. Moreover, in the case of the non-financial stocks, market volatility decreased even though the short selling ban was lifted. These results suggest no evidence that short selling increases market volatility.

Second, spread did not decrease when compared to the period before the ban even though the volume increased moderately during the ban period. Also, decreasing amount of spread was more noticeable for non-financial stocks than financial stocks after lifting the short sales ban. These results suggest that short sellers have emerged as a liquidity provider, contributing to the market efficiency.
Third, as a result of the short selling ban, ask price residual quantity decreased relatively more for non-financial stocks. In other words, the imbalance of ask residual quantity decreased significantly during short selling ban period, in which the bid submission of short sellers was banned. Short sellers contribute to the market depth and asymmetry of the order imbalance.

Overall, we conclude that short selling provides liquidity to the market and improves market quality, suggesting that short selling restriction leads to costs that hamper market efficiency.

Based on results from the empirical analysis, this paper suggests that regulatory authorities consider short sale ban on a certain stock rather than on the whole sector such as non-financial and financial stocks. In this way, the risk of the regulation acting as a hindrance to market efficiency can be minimized. The period of short sale ban should also be restricted to a minimum length of time, and the effect of the prohibition should be evaluated after a certain period of time to decide whether to extend the ban period.

발간사
요 약

제1장서론

제2장주요국의 공매도 규제 현황

제3장선행연구

제4장자료 및 연구방법

제5장공매도 금지 전후의 일중 분석
　제1절변동성(volatility)
　제2절스프레드(spread)
　제3절시장심도(market depth)와 주문불균형(order imbalance)
　제4절강건성 분석: 공매도 금지 전후 1개월 자료 이용 분석
　제5절강건성 분석: 대조표본을 이용한 분석
　제6장일별 자료를 이용한 분석
　제1절누적비정상수익률(CAR)
　제2절변동성(volatility)
　제3절유동성(liquidity)

제7장결론

참고문헌
ABSTRACT