Chapter 39 - The Information Content of Short Selling before Macroeconomic Announcements

Abstract

This chapter uses a comprehensive data set of daily short selling to explore key features of short sale transactions in equity exchange-traded funds (ETFs) prior to the release of key economic indicator data and examines whether short sellers are generally able to predict the content of key economic indicator announcements. Key economic indicators inform market participants and the public at large about general economic conditions and the related macroeconomic announcements are generally scheduled to be released at predetermined times. Investors with private information about the contents of these macroeconomic reports can establish short positions in ETFs when they expect a negative data release or, equivalently, can refrain from shorting shares when they expect a positive release. The tests found evidence of informed prerelease short selling for the Employment Situation Report, but not for other economic indicator data releases, including the Manufacturing Institute for Supply Management Report, Manufacturers' Shipments, Inventories, and Orders (M3) Survey, New Residential Construction Report, gross domestic product, producer price index, consumer price index, consumer confidence, consumer sentiment, and retail sales. Perhaps because the Employment Situation Report is arguably the most influential economic report, traders therefore may spend more resources in an attempt to predict its content.