Impacts of short selling restrictions on stocks traded at Borsa İstanbul

Abstract

This study investigates impacts of short sale restrictions, particularly uptick rule which was repealed at 02.01.2014, on returns of stocks traded at Borsa Istanbul between January 2012 and March 2014. Firstly, time-series regressions are conducted to test the performance of the Fama - French (1993) three-factor model with four different portfolios, sorted according to their short sale volume ratio before and after repeal of uptick rule. The results show that in the after period portfolio consisting of heavily shorted stocks has the only significant and negative Jensen’s alpha. This indicates that after repeal of uptick rule heavily shorted stocks underperform probably because of reflection of the pessimists’ beliefs as short positions which drive asset prices down unnecessarily. Secondly, an additional short sale factor (SS), is calculated and regressed as an fourth explanatory variable in Fama-French model in an attempt to determine the common risk factors that capture the variation in stock returns before and after repeal of uptick rule. This study explores that while short sale factor (SS) substitutes size factor before repeal of uptick rule it doesn’t replace size factor after repeal of uptick rule and gains independent explanatory power from size.