Analysis indicates that the South Korean stock market was sluggish for about one month after the resumption of short selling. Financial authorities are reorganizing the computer system and regulations, and short selling will be reinstated starting March 31.
Short selling is an investment technique where an order to sell stocks borrowed from others is placed when there is an expectation that the stock price will fall, aiming for price differences.
Yeom Dong-chan, a researcher at Korea Investment Securities, released a report titled "One month ahead of the resumption of short selling: Lessons from past three resumptions" on the 28th. The report's core finding is that the domestic stock market was somewhat sluggish for one month following the three periods of short selling bans from October 2008 to May 2009, August 2011 to September 2011, and March 2020 to April 2021.
In particular, the underperformance of stocks with a high price-to-book ratio (PBR, market capitalization ÷ net worth) was notable. Researcher Yeom noted, "In the case of stocks with a high PBR, there is a greater likelihood of a high return on equity (ROE). After the resumption of short selling, profit-taking sell orders emerged in that sector," adding, "This indicates that stocks with high valuation may be vulnerable right after the resumption of short selling."
However, unlike the good performances of the South Korean stock market during the previous three short selling ban periods, there is a difference this time, as the market has underperformed during the current ban period (November 2023 to March 2025). Additionally, short selling is expected to be reinstated at the end of next month, expanding the eligible stocks for short selling from the existing KOSPI 200 index and KOSDAQ 150 index to all stocks.
Although the performance in the month immediately following the resumption of short selling was poor, a broader time frame of three months shows a favorable outcome. Researcher Yeom stated, "It is difficult to say that the resumption of short selling hinders mid- to long-term market growth, but it can be a factor that expands volatility for about a month."
Researcher Yeom explained that it is also difficult to consider stocks that performed well during the short selling ban period as targets for short selling. There have been cases where stocks that performed well during the second short selling ban period rose further after the resumption of short selling. Yeom added, "It makes more sense to approach this from the valuation perspective rather than recent returns before the resumption of short selling."