Paper: Naked Short Selling: The Emperor’s New Clothes?

Paper

Naked Short Selling: The Emperor’s New Clothes?

Veljko Fotak, Vikas Raman, Pradeep K. Yadav

University of Oregon, 6 July 2009

Regulatory and media concern has focused heavily on the potentially manipulative distortion of market prices associated with naked short selling. However, naked shorting can also have beneficial effects for liquidity and pricing efficiency. We empirically investigate the impact of naked short-selling on market quality, and find that naked shorting leads to significant reduction in positive pricing errors, the volatility of stock price returns, bid-ask spreads, and pricing error volatility. We study naked shorting surrounding the demise of financial institutions hardest hit by the financial crisis in 2008 and find no evidence that stock price declines were caused by naked shorting.

PDF (51 pages): Naked Short Selling: The Emperor’s New Clothes?