A Study on the Effectiveness of Short-selling Regulation using Artificial Markets

Abstract

Since the subprime mortgage crisis in the United Sates, stock markets around the world have crashed, revealing their instability. To stem the decline in stock prices, short-selling regulations have been implemented in many markets. However, their effectiveness remains unclear. In this paper, we discuss the effectiveness of short-selling regulation using artificial markets which is an agent-based model of financial markets. We indicate that the short-term regulation contributes to the market stability because of the prevention of the decline in stock price but the long-term regulation inhibits it because of bubbles emergence. First, we constructed an artificial market that allows short-selling and an artificial market with short-selling regulation and have observed the stock prices in both of these markets. We found that the market in which short-selling was allowed was more stable than the market with short-selling regulation, and bubbles emerged in the regulated market. Next, we evaluated the values of assets of agents who used three trading strategies, specifically, these agents were fundamentalists, chartists, and noise traders. The fundamentalists had the best performance among the three types of agents. Finally, we compared the price variation in the market in which short-selling was regulated with that in which it was not regulated after markets satisfied a regulation condition. Thus, we confirmed that the former rebounded faster than the latter.

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Correspondence to Isao Yagi.

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Yagi, I., Mizuta, T. & Izumi, K. A Study on the Effectiveness of Short-selling Regulation using Artificial Markets. Evolut Inst Econ Rev 7, 113–132 (2010). https://doi.org/10.14441/eier.7.113

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Keywords

  • short-selling regulation
  • financial market
  • artificial market
  • agent-based simulation

JEL

  • C63
  • G18
  • G01