Research co-authored by Haas Lecturer Ethan Namvar that found a 2008 ban on short sales inflated stock prices was recently chosen by four Nobel laureates to receive the Journal of Investment Management’s 2013 Special Distinction Award.
Namvar’s winning paper, “Price Inflation and Wealth Transfer During the 2008 SEC Short Sale Ban,” was selected by a final panel that consisted of Nobel laureates Harry M. Markowitz, Robert C. Merton, Myron S. Scholes, and William F. Sharpe. The paper, which appeared in the journal’s second quarter 2013 issue, was co-authored with Lawrence E. Harris of the University of Southern California and Blake Phillips of the University of Waterloo.
The paper focuses on the turmoil in financial markets following the collapse of Lehman Brothers in 2008, when the Securities and Exchange Commission banned short selling of financial sector stocks in the United States. The objective was to restore market equilibrium and stabilize prices by removing short sales—a source of downward pressure.
Using a factor-analytic model that extracts common valuation information from the prices of stocks that were not banned, the trio estimated that the short sale ban inflated prices of effected stocks by approximately 10 percent to 12 percent. The effect of the ban was not permanent; thus, investors who purchased stock during the ban paid more than they would have otherwise. The research provides a conservative estimate of $2.3 billion to $4.9 billion in wealth transfer from buyers to sellers as a result of the ban.
“Financial crises are chaotic by definition, and it's very challenging to draw definitive conclusions,” says Namvar. “From our study however, we felt that we did observe price inflation in financial stocks and subsequent reversion for companies that were doing poorly prior to the ban. We simply wanted to document the effect and offer an economic assessment.”
“We hope the paper will serve as a reference for regulatory agencies when contemplating future short-sale bans,” Namvar adds.
Namvar has been a lecturer in the Haas Finance Group since 2011. He taught the undergraduate Introduction to Financial Engineering course in the fall.
The Special Distinction Award will be presented to Namvar and his co-authors later this year at the Journal of Investment Management’s spring conference in San Diego, Calif.