The unexpected ways of life: from Bosnia to the Netherlands

Upbringing

As a child and later as a student, I had no clear career path in mind. Of course, as kids we almost all had our dream jobs, such as pilot, spaceman or professional athlete. I fell in love with football and the idea of becoming a professional football player. But on a more serious note, I have always enjoyed math classes or coding my own small computer applications. I was just generally interested in computers. In the end, I decided to combine this passion for analytical thinking with more real-life problems and started my studies of economics in Germany.

My first years at university were particularly exciting and intensive. Everything was new when I moved from Bosnia and Herzegovina to Germany: new people, new culture, new language; I had to adapt to an entirely new environment. As a result, I was not really proud of my grades in the first years. Probably this was one of the reasons why I had not given much thought to a career in academia at that time. However, later during my master studies and particularly while writing my thesis with the econometrics department, I really enjoyed studying economic questions and applying tools to new data sets to learn more about financial markets or economics in general.

Research

I conduct research on the impact of short selling on financial markets and transparency regulations for short sellers. What is a short sale? In a covered short sale, investors borrow and sell a security that they do not own in the hope to repurchase it at the end of the borrowing period for a lower price and return it to the lender. If the price of the security falls during that period, short sellers make a profit; otherwise they suffer a loss. What fascinates me about short selling is how it is perceived differently by different members of our society. When we consider the financial crisis 2007-09, the COVID-19 market crash or any market downturn, we can read many news articles conjecturing that short sellers are the evil guys, manipulating prices to fall. On the other hand, most research papers find evidence consistent with the notion that short sellers help increasing market quality, efficiency, and liquidity. These disparities between society, the media, and literature fascinate me in particular.

In a recent project with two co-authors from the German Central Bank, we study how transparency and disclosure regulations influence short sellers’ behavior and whether this has an effect on market quality, particularly market efficiency. We ask whether short sellers change their trading behavior if they have to reveal their short positions to other market participants. We use a recent regulation update in Europe where short sellers must reveal their name, the name of the stock they short, and the size of the short position when the position is large enough. We find that this regulation has a negative effect on short sellers’ trading. In particular, a significant number of short sellers halt trading to avoid crossing the publication threshold and disclosing their short positions. We also observe that the most knowledgeable market participants are those who stay under the radar, that is, those who do not wish to declare their positions. What is the reason for this? We can only speculate but empirical evidence suggests that one reason why short sellers avoid declaring their short position is that they want to keep their strategy a secret. Another possibility is that they desire to remain in the dark and avoid being labeled as the evil guys. They wish to keep the connection and link with the company's management. Overall, our findings suggest that there might be unintended negative consequences of the new regulation on market quality. Less short selling can result in prices not reflecting the fundamental value of a company.

It is difficult to offer clear policy recommendations solely based on our study. However, one can think of different adjustments of the regulation that could help to alleviate the concerns. One possibility is to raise or lower the threshold at which short sellers must report their short positions. Alternatively, regulators may incorporate a reporting delay. For example, short sellers could publish their positions after a one or two-weeks delay. Another option is that short sellers may continue submitting their short positions only to the regulator. The regulator could gather this information for regulatory purposes and only release the data to the market without revealing the names of the short sellers. All these adjustments are conceivable and could help mitigating the unexpected consequences of position transparency.