Effects of short sale ban on financial liquidity in crisis and non-crisis periods: a propensity score-matching approach

We investigate the impact of banning the short-selling (shorting ban) on liquidity of stocks traded in the Hong Kong Stock Exchange (HKEx) on the basis of the 20 revisions of the designated list of shortable stocks from January 2006 to December 2010. In order to avoid endogeneity due to the liquidity-adaptive implementation of the ban policy, we use the propensity score-matching of shortable and unshortable stocks and apply the double- and triple-difference methods embedded in the fixed effect panel regression for the matched data. Using two outcome variables for illiquidity, the Amihud price-impact measure, and the bid-ask spread, our results suggests that the shorting ban in this market may have a liquidity-supporting effect in terms of the price impact with no regard to market tranquility and in terms of the spread with regard to the 2008-2009 financial crisis.