Analysis of Short-selling Effects Using KOSPI200 and KOSDAQ150 Indexing

Financial regulators often react to crises by restricting short-selling to stabilize the stock market. In response to the COVID-19 pandemic, the Korean government banned short-selling in 2020. Since 2021, it has allowed partial resumption only for stocks indexed in KOSPI200 and KOSDAQ150. This unique short-selling regime in Korea makes newly indexed or excluded stocks experience exogenous variations in their short-selling availability when the constituents of the two indices are updated. Using this quasi-natural experimental setting, we examine the impact of short-selling permission and ban. The results show that short-selling permission enhances stocks’ price efficiencies while short-selling permission and ban do not strongly influence stock return or volatility. Overall, this paper provides empirical evidence supporting the positive role of short-selling, further casting doubts on the reasons behind banning short-selling.