Selling Pressure Research Articles

The January Effect and Prospect Theory in Taiwan

ABSTRACTProspect theory can predict the January effect. The capital gains overhang is a dominant variable in predicting the January effect, and past returns are only a noisy proxy. Empirical results based on date from Taiwan support our argument. At the beginning of every January, as proposed by the prospect theory, stocks with the lowest capital gains overhang induce investors to hold on to their losing stocks, which in turn restricts available supply and reduces selling pressure in January. Thus, because investors are willing to sell only at a premium, trading takes place at an inflated price, which causes the January effect.

Funding liquidity risk and the low-volatility anomaly: Evidence from the Taiwan stock market

We investigate whether the funding liquidity risk to institutional investors influences the negative relation between expected returns and variance (the ‘‘Low-volatility anomaly’’). With the Taiwan stock market as a setting, we implement a multivariate Markov switching model and use the funding liquidity risk to model the time-varying transition probabilities of the regime-switching process to capture changes in the funding liquidity risk regime. Our evidence documents that the low-volatility anomaly is most pronounced when there is high funding liquidity risk. When there is low funding liquidity risk, however, the low-volatility anomaly has a significant reversal. These results imply that the increased funding liquidity risk due to financial shock transmitted from parent banks is associated with higher selling pressure on institutional investors’ high-volatility stocks, leading to the low-volatility anomaly.

Positive Feedback Trading and Stock Prices: Evidence from Mutual Funds

A mutual fund’s demand for a pricing factor, measured by the loading of the fund’s returns on the factor’s returns, is persistent over time. When stock characteristics are time-varying and change frequently, persistence in factor demand generates a need for rebalancing. This rebalancing motive, in turn, leads to predictable trading from mutual funds and contributes to cross-sectional return predictability. In particular, when there is a “mismatch” between a stock’s characteristic and the underlying funds’ demand for that characteristic, the “mismatched” stock will face selling pressure from the underlying funds and subsequently earn lower returns. Double-sorting on stocks’ characteristics and mutual funds’ factor demand refines value and momentum strategies, generating abnormal returns that cannot be explained by subsequent fundamentals or retail trading flows.

Did the Introduction of Bitcoin Futures Crash the Bitcoin Market at the End of 2017?

At the end of 2017, the Bitcoin price dropped significantly by around 70% over two months. Since the introduction of Bitcoin futures coincided with this market crash, the new financial instrument might have caused the market crash, the literature emphasizing that the futures enabled investors to easily take a short position and suggesting the selling pressure from futures could have potentially crashed the Bitcoin market. To evaluate this assumption, we investigate the empirical relationship between the futures trade and Bitcoin price by using high-frequency data. We find that the trade of Bitcoin futures was not significantly related to the returns on Bitcoin futures and spot returns. Therefore, we conclude Bitcoin futures did not lead to the crash of the Bitcoin market at the end of 2017.

Don’t Touch My Cheese: Short Selling Pressure, Executive Compensation Justification, and Real Activity Earnings Management

ABSTRACTThis article aims at investigating the effects of short selling on a firm’s executive compensation and earnings management. We use a panel data set of Chinese public firms from 2007 to 2014 to test our hypotheses. We find that the level of excess compensation in short-selling firms is greater than that in non-short-selling firms. Our further analysis shows that the executives of the short-selling firms will justify their excess compensation by improving the pay-performance sensitivity, which is accomplished through the real earnings management. Finally, we find that there is more prominent decrease/increase in accrual/real earnings management in short-selling firms.

Foreign Exchange Order Flow as a Risk Factor

This paper proposes a set of novel pricing factors for currency returns that are motivated by microstructure models. In so doing, we bring two strands of the exchange rate literature, namely market-microstructure and risk-based models, closer together. Our novel factors use order flow data to provide direct measures of buying and selling pressure related to carry trading and momentum strategies. We find that they appear to be good proxies for currency crash risk. Additionally, we show that the association between our order-flow factors and currency returns differs according to the customer segment of the foreign exchange market. In particular, it appears that financial customers are risk takers in the market, while non-financial customers serve as liquidity providers.

Flash crash and policy uncertainty

This paper constructs a generalized theoretical model to examine potentially high price variation and insufficient liquidity as the requirements for an enormous crash in a short period. In a market with insufficient liquidity, rapid changes in information induce selling pressure, therefore, this paper defines the prerequisite of a flash crash (large-scale decline in a short period of time) as when a market has insufficient liquidity and high price variability. Policy uncertainty provides an environment conducive to the occurrence of flash crashes. The paper examines the effect of economic policy uncertainty on the daily returns of the U.K. stock and foreign exchange markets. The results reveal that policy uncertainty is highly correlated with the risk of short-term, large-scale decline, which validates the theoretical inference of this paper. Although the timing at which extreme risks emerge is difficult to predict, this paper includes policy uncertainty as a factor to explain market conditions that can lead to flash crashes and remind traders to consider this factor when predicting the risk and value at risk of a market.

An Evaluation of Some Key Economic Policies

For roughly the past three years, Indonesia’s growth has maintained its slight upward trend while inflation has been broadly on target. The budget deficit has been kept under control and government debt is low relative to that of many other countries. Nevertheless, this sound macroeconomic performance is now under threat because the government’s aversion to depreciation of the currency has led it to introduce unnecessary contractionary fiscal measures—including cutbacks of spending on infrastructure on which output growth depends. Along with many other currencies, the rupiah has depreciated significantly throughout much of 2018—despite the attempts of Bank Indonesia, the central bank, to prevent this—partly because of rapidly growing imports, but also because of a reversal of portfolio capital inflow. This reversal reflects various factors, including Bank Indonesia’s policy, until recently, of pushing interest rates down while global interest rates have been rising; fear that rapid depreciation in poorly managed economies such as Turkey and Argentina may prove contagious; market recognition that expansion of the current account deficit is likely to require depreciation beyond that desired by the central bank; and concern that the forthcoming presidential election creates conditions in which it will be difficult to pursue sound economic policies. This survey discusses the rather unexpected currency depreciation and associated selling pressure in the stock exchange in detail before going on to provide evaluations of, and suggestions in relation to, a range of microeconomic policies, including infrastructure development; the provision of subsidised loans to small businesses; the fiscal aspects of decentralisation; minimum wages; and management of the bureaucracy. To a large extent, most of these policies can be characterised as reflecting a distrust of market forces, including a reluctance to adopt market-mimicking processes in the public sector—specifically, in relation to the funding of local governments, and to the staffing of the bureaucracy. From another perspective, the adoption of a wide variety of objectives for economic policy reflects the absence of any consistent analytical framework, making it highly likely that policies will turn out to be mutually inconsistent and, in particular, that they will conflict with the ultimate economic objective of increasing living standards, especially those of the poor.

The Determinants of Real Estate Fund Closures

During the October 2008 fund crisis, approximately one-third of German open-end real estate retail funds, with total assets under management of about EUR 30 billion, were forced to close (suspend share redemptions). A fund closure generally leads to fund liquidation, which poses a serious challenge to management and investors. As a consequence, the fund management is forced to liquidate the fund by selling the real estate assets. The liquidation often occurs under conditions of high selling pressure, and may involve significant fees. Furthermore, in the event of a fund closure, fund investors’ capital is totally constrained (i.e., investors can only sell their shares on the secondary market, but for significantly discounted prices). Thus, knowing the determinants of fund closures could help fund management adjust investment strategies and diminish closure risk. Our monthly panel dataset contains fund specific information such as the liquidity ratio, capital net inflows, leverage ratio, and management fees for the entire population of German open-end real estate retail funds over the August 2002-June 2016 period. The results of our logit model suggest a significantly positive influence of fund run risk and industrywide spillover effects, as well as a negative influence of economies of scale and scope on fund closure probability. Our results also indicate that having a greater share of institutional investors tends to increase fund closure probability.

The Hong Kong Housing 'Bubble' and the Foreign Exchange Rate

Housing prices in Hong Kong have been rising for more than a decade and recent hikes are mainly driven by Mainland developers in the primary market. Local developers and residents seem to be relatively conservative as the prospects for the Hong Kong housing market have been dim due to low affordability and the demographic situation. When the “bubble” collapses, it is highly likely that Mainland developers will be hit the hardest and local players will limit their losses. However, the sharp drop in Hong Kong housing prices will attract short sellers who could leverage the weakness in the Hong Kong currency-peg system. The selling pressure on the HKD and stocks could push up local interest rates and create real and more severe economic damage.

Price Pressure and Overnight Seasoned Equity Offerings

Between 2009 and 2014, 75% of seasoned equity offerings (SEOs) were announced and issued overnight, compared to 27% between 2000 and 2008. Overnight issuers obtain a higher SEO offer price because they experience more favorable pre-offer returns. Consistent with these favorable returns being due to the avoidance of pre-issue selling pressure, non-overnight issuers experience a 2.5% pre-issue stock-price decline that reverses within 7 days. This post-issue reversal is increasing in SEO offer size and bigger following large pre-issue price declines. In contrast, returns following overnight offerings are less positive and unrelated to SEO offer size or pre-issue returns.

Flow-Induced Trading Pressure and Corporate Investment

The impact of liquidity-motivated institutional trading on firms’ real decisions is not confined to periods of financial crisis. Firms subject to mutual fund flow-driven selling pressure reduce share issuance and investment, whereas firms experiencing buying pressure do not increase investment, although they issue more equity. Firms under extreme selling pressure cut quarterly investment by 0.075 percentage points of total assets, which is 4.3% of the average quarterly investment in our sample. We also find evidence that the effect is not attributed to managerial learning or catering incentives. Rather, flow-driven trading affects investment mainly through its impact on the financing cost.

Immediate and Long‐Term Benefits of In‐Store Return Experience

This study contributes to the understanding of customer relationship management by assessing how an in‐store customer return experience can influence customer exchange behavior and satisfaction during a return event, and customer repurchase behavior following a return event. Exchanges, satisfaction, and repurchases are potential customer relationship management outcomes that may contribute to customer lifetime value. We empirically examine these outcomes with respect to two store labor factors: salesperson competence and selling pressure. Using transactional data and 7921 customer satisfaction survey responses obtained from a jewelry retailer, we demonstrate an in‐store return experience may contribute to customer lifetime value more through future purchases than through immediate exchanges. We show convincing customers to exchange their returns may decrease their future purchases if customers are dissatisfied with their return experience. Our results suggest, in order to increase both exchanges and future purchases, retailers should improve the competence of employees who handle returns and abstain from using selling pressure during a return experience. We also conduct a counterfactual analysis to assess the impact on net sales of several return experience improvement initiatives. Overall, our analysis provides evidence that an in‐store return experience represents a significant opportunity for retailers when handled carefully.

외국인 공매도 거래와 일중 가격반전 분석

외국인 공매도 거래와 일중 가격반전 분석

The Flash Crash: High‐Frequency Trading in an Electronic Market

ABSTRACTWe study intraday market intermediation in an electronic market before and during a period of large and temporary selling pressure. On May 6, 2010, U.S. financial markets experienced a systemic intraday event—the Flash Crash—where a large automated selling program was rapidly executed in the E‐mini S&P 500 stock index futures market. Using audit trail transaction‐level data for the E‐mini on May 6 and the previous three days, we find that the trading pattern of the most active nondesignated intraday intermediaries (classified as High‐Frequency Traders) did not change when prices fell during the Flash Crash.

Institutional Investors and Equity Prices: Information, Behavioral Bias, and Arbitrage

This paper investigates how institutional investors matter for asset pricing by using daily institutional trading data and a natural experiment, the split–share structure reform in China. This reform required all listed companies to convert their non-tradable shares to tradable shares after paying a negotiated compensation. We find that: 1). Only passive institutions are privy to company-specific details: they buy (avoid) shares of companies that end up with high (low) compensation ratios on announcement day T0. 2). Trading halts after T0. On the first subsequent trading day T1, both passive domestic institutions and individuals are prone to the disposition effect: they sell a large and abnormal amount of shares in the reform companies with high unrealized gains accumulated during the non-trading period, and 3). The selling pressure drives stock prices significantly below fair values. Both active and foreign institutions take advantage of the stock undervaluation and earn significant abnormal return, which eliminate stock mispricing.

Futures Trading: Informational Content of Open Interest and Trading Volume on Futures Price

In an agriculture dominated country, like India, farmers face not only yield risk but price risk as well. Commodity futures market play major role in the price risk management process, especially in agriculture. This study empirically analyses the informational content of open interest and trading volume on futures price determination on the basis of selected agricultural commodities. Breusch-Godfrey Serial Correlation LM Test is used for analyzing the role of informational content of open interest and trading volume on futures price. Empirical result shown that open interest playing a major role in futures price determination on commodity futures trading. In case of trading volume, the results show that a significant negative impact on futures price. The study strongly argues that the stockholders will be benefited through informational content of open interest and volume there by reducing the risk involved in the futures market. By monitoring the price trend, volume and open interest the technician is better able to measure the buying or selling pressure behind market moves. This will provide traders with valuable information to develop a suitable pricing strategy and an appropriate production and marketing plan for producers farming.

Bank capital in the crisis: It's not just how much you have but who provides it

Abstract Bank capital is the cornerstone of bank regulation and is considered a key determinant of a bank's ability to withstand economic shocks. In the area of bank capital regulation, the general view is that more bank capital is better, irrespective of who provides it. In this paper, we investigate whether the investment horizon of bank capital providers matters for bank performance during the recent financial crisis. We observe that banks with more short-term investor ownership have worse stock returns during the crisis. Further exploration suggests that this is partially because banks with higher short-term investor ownership took more risk prior to the crisis but mainly because they experienced higher selling pressure during the crisis. Our results confirm the economic benefit of bank capital in helping banks to perform better during crises. However, when we decompose bank capital by the nature of its providers, we show that more capital is associated with worse performance when it is provided by short-term institutional investors.

Impact of bankruptcy through asset portfolios

We investigate the Japanese banking crisis in the late 1990s with a simple network based mathematical model, which allows us to simulate the crisis as well as to obtain new perspective through analytic solution of our network model. We effectively identify the actual bankrupted banks and the robustness of the banking system using a simulation model based on properties of a bi-partite bank-asset network. We show the mean time property and analytical solution of the model revealing aggregate time dynamics of bank asset prices throughout the banking crisis. The results disclose simple but fundamental property of asset growth, instrumental for understanding the bank crisis. We also estimate the selling pressure for each asset type, derived from a Cascading Failure Model (CFM), offering new perspective for investigating the phenomenon of banking crisis.

Asset fire sales in equity markets: Evidence from a quasi-natural experiment

Abstract In November of 2007 a fire sale of Chilean stocks was triggered by a change in the constraints that regulate pension fund portfolios. This regulatory shock provided a cleanly identified fire sale unrelated to fundamentals. Stocks with more selling pressure from pension funds lost approximately 4% in November compared to other stocks. Although the selling pressure was temporary, prices reverted only after four to six months. Pension funds initially mitigated the impact of the fire sale by selling large index stocks in which demanding liquidity was less costly. Coordination across pension funds increased during the fire sale. We find no significant evidence of real effects on firm investment in the quarters after the fire sale.