Sovereign CDS Spreads, Volatility, and Liquidity: Evidence from 2010 German Short Sale Ban


  • We thank Robert Battalio (the editor) and one anonymous referee for their valuable comments.

Department of Finance, College of Business Administration, Kent State University, Kent, OH 44240; Phone: (330) 672-1200; E-mail:


The paper examines global impact of 2010 German short sale ban on sovereign credit default swap (CDS) spreads, volatility, and liquidity across 54 countries. We find that CDS spreads continue rising after the ban in the debt crisis region, which suggests that the short selling ban is incapable of suppressing soaring borrowing costs in these countries. However, we find that the ban helps stabilize the CDS market by reducing CDS volatility. The reduction in CDS volatility is greater in the eurozone than that in the non-eurozone. Furthermore, we find that the CDS market liquidity has been impaired during the ban for the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) countries. In contrast, there are no dramatic changes in the market liquidity for non-PIIGS eurozone and non-eurozone samples. The findings suggest that the short sale ban is ineffective to reduce sovereign borrowing costs in the debt crisis region if the underlying economy has not been significantly improved.