GARCH With Intervention Analysis to Evaluate Short Selling Restrictions

ABSTRACT At a critical moment in the 2007–2009 financial crisis, financial authorities in the US, Japan, the United Kingdom, France, Canada, and Germany unanimously banned short sales in their respective markets. We estimate GARCH models with intervention analysis to assess the effect of such regulatory decisions on the unconditional or long‐term stock market volatility, and we focus on trading days under short selling restrictions. Contrary to the conclusion reached by some important literature, our findings reveal that, for all six aforementioned markets, the volatility did not grow once the restrictions were imposed, and it began to decrease to the levels observed previously to the bankruptcy of Lehman Brothers.