Short Selling Activity Research Articles

On the predictability of stock market bubbles: evidence from LPPLS confidence multi-scale indicators

We examine the predictability of positive and negative stock market bubbles via an application of the LPPLS Confidence Multi-scale Indicators to the , FTSE and NIKKEI indexes. We find that the LPPLS framework is able to successfully capture, ex-ante, some of the prominent bubbles across different time scales, such as the Black Monday, Dot-com, and Subprime Crisis periods. We then show that measures of short selling activity have robust predictive power over negative bubbles across both short and long time horizons, in line with the previous studies suggesting that short sellers have predictive ability over stock price crash risks. Market liquidity, on the other hand, is found to have robust predictive power over both the negative and positive bubbles, while its predictive power is largely limited to short horizons. Short selling and liquidity are thus identified as two important factors contributing to the LPPLS-based bubble indicators. The evidence overall points to the predictability of stock market bubbles using market-based proxies of trading activity and can be used as a guideline to model and monitor the occurrence of bubble conditions in financial markets.

Can short selling activity predict the future returns of non-shortable peer firms?

Will short-selling activities impact related peer firms? We explore this question in this paper by examining the role of short-selling activity in information transfer and cross-predictability, using the unique institutional setting of short-sales activity in the Chinese stock market. Beginning in 2010, the short selling of selected stocks in the Chinese stock market was allowed for the first time, with other stocks remaining non-shortable. Using this setting, we examine the cross-predictive ability of industry-level short flow with respect to the future abnormal returns of non-shortable firms in the same industry. We find that the average of short flow at the industry-level is negatively and significantly associated with the future abnormal returns of non-shortable peer firms in the same industry. The result is persistent and is not driven by differences in firm characteristics, lead-lag effects, the effect of short-selling constraints, or short sellers' concentration. Further investigation shows that the effect of industry short flow survives with the control of firm-level shorting and is negatively related to future changes in the non-shortable firms' fundamentals, implying that short-selling activity contains valuable information that also affects other related firms.

Short selling in extreme events

We study the association between daily changes in short selling activity and financial stock prices during extreme events using TailCoR, a measure of tail correlation. For the largest European and US banks, as well as European insurers, we uncover a strong relation during exceptional (extreme) days and a weak relation during normal (average) days. Examining days with large increases in short positions and large downfalls in stock prices, we find evidence of both momentum and contrarian short selling taking place. For North American bank stocks, contrarian short selling appears more practiced than for European bank and insurance stocks. We find that the uncovered relationship decreases with firm size and increases during ban periods, which is in line with short selling becoming more informative when constrained.

Short Selling, Trading Activity and Volatility in Corporate Bond Market

We investigate the impact of short selling activity on trading activity and price volatility in the U.S corporate bond market. Consistent with prior literature, we find that investors use short selling as a platform to express their difference of opinions. In addition, we find that the positive relation between short selling activity and price volatility becomes weaker during period when investors’ expectations tend to be more homogenous such as the Global Financial Crisis (GFC). More importantly, we show that short selling in the corporate bond market is not simply a substitute to equity short selling and option trading for investors to trade negative news and information against the underlying company. On the contrary, it is an independent conduit for investors to express difference of opinions specific to bond.

Security price formation and informed trading with constrained short selling

Short sale orders account for a substantial portion of trading volume in recent years. This paper develops a sequential trade model with constrained short selling to derive the effect on prices when the market maker can observe short selling in the order flow. The model predicts that market quotes will adjust differently to short sales and regular sales. Furthermore, the model shows that the probability of informed trading is impacted both by the level of short sale constraints and the intensity of actual short sale trades. Simulation evidence confirms that estimates of the probability of informed trade are improved when accounting for past short selling activity. The results demonstrate the information benefits of short selling transparency.

Do Banks Learn from Other Financial Markets? Evidence from Loan Contract Design

This paper examines the feedback effect between trading in financial markets and bank loan contracting. We find that banks charge higher loan rates for borrowers with higher short selling activities. This result is robust to various identification tests and robustness checks. We further find that this effect is not driven by bear raid risk but rather the information content of short selling. Supporting this argument, our result is stronger when the information asymmetry between the bank and the borrowing firm is greater. Overall, our findings suggest that the information content of short selling has important implications for bank loan costs.

Do Short Sellers Trade on Private Information or False Information?

We investigate whether short sellers contribute toward the informational efficiency of market prices by trading on their private information or destabilize market prices by trading on rumors and false information. We find that short-selling activities are considerably informative about future stock returns when there is a higher likelihood of private information in stocks, as measured by insider-trading activities. Short sellers also bring considerable additional information to the market that is not fully captured by contemporaneous insider trading. Overall, these results suggest that on average, short sellers bring informational efficiency to market prices rather than destabilize them.

The Loud Silence of Suppressed Short-Sale Demand

Utilizing the special institutional setting in the Chinese securities market, we examine how suppressed short-sale demand influences stock valuations and price efficiency for stocks with no short-selling activities. Based on revealed short-sale volume of shortable stocks, we employ a characteristics model to estimate the suppressed short-sale demand for non-shortable stocks, with a higher short-sale demand being suppressed indicates a more binding short-sale constraint. We find that suppressed short-sale demand negatively predicts future returns, and such relation concentrates among firms with poor information environment. Consistent with Diamond and Verrecchia (1987)’s reduced-pricing-efficiency theory, we find that a higher suppressed short-sale demand is associated with a greater price delay and a stronger post-earnings-announcement-drift.

On the Predictability of Stock Market Bubbles: Evidence from LPPLS ConfidenceTM Multi-Scale Indicators

We examine the predictive power of market-based indicators over the positive and negative stock market bubbles via an application of the LPPLS Confidence TM Multi-scale Indicators to the S&P 500 index. We find that the LPPLS framework is able to successfully capture, ex-ante, some of the prominent bubbles across different time scales, such as the Black Monday, Dot-com, and Subprime Crisis periods. We then show that measures of short selling activity have robust predictive power over negative bubbles across both short and long time horizons, in line with the previous studies suggesting that short sellers have predictive ability over stock price crash risks. Market liquidity, on the other hand, is found to have robust predictive power over both the negative and positive bubbles, while its predictive power is largely limited to short horizons. Short selling and liquidity are thus identified as two important factors contributing to the LPPLS-based bubble indicators. The evidence overall points to the predictability of stock market bubbles using market-based proxies of trading activity and can be used as a guideline to model and monitor the occurrence of bubble conditions in financial markets.

Short selling around the expiration of IPO share lockups

Abstract We are the first to examine daily short selling activity around the expiration of IPO share lockups. We find that short selling increases before the lockup expiration date and declines afterward, and the level of short selling is higher in stocks of venture capital (VC)- and private equity (PE)-backed IPOs than other IPOs. Unlike VC-backed IPO stocks, PE-backed IPO stocks do not experience a negative return or a trading volume jump on the lockup expiration date. PE investors do not reduce percentage ownership in the IPO firm as much as VC investors do after lockup expirations. Short selling in PE- and VC-backed IPO stocks prior to the lockup expiration date can predict PE and VC ownership reduction but not the stock returns after the lockup expires. In contrast, short selling in stocks of the IPO firms without a PE or VC investor can predict stock returns after the lockup expires.

How does short selling affect liquidity in financial markets?

The paper seeks to determine whether short selling increases or decreases liquidity in U.S. equity markets. On one hand, prior research indicates that short sellers may act, at times, as liquidity providers. On the other hand, other research in market microstructure argues that spreads will widen in the presence of informed traders – a classification generally given to short sellers. Results from a series of new, multivariate time-series tests show that exogenous shocks to short selling activity generally lead to a widening of bid-ask spreads in smaller-cap stocks. The results, however, do not hold for larger-cap stocks.

The Big Short: Short Selling Activity and Predictability in House Prices

AbstractWe study how investors can use financial securities to speculate on the decrease of house prices. Unlike most asset types, houses are subject to high trading frictions and cannot be sold short directly. Using U.S. equity lending data from 2006 through 2013, we find evidence that an increase in the short selling activity of real estate investment trusts (REITs) forecasts a decrease in house prices in the subsequent month. The magnitude and significance of this effect vary with the geographical location of the REITs' underlying properties and with the housing cycle.

Short Selling and Economic Policy Uncertainty

We study the trading behavior of short sellers in the presence of economic policy uncertainty (EPU). Daily short selling activity at either the aggregate level or the individual stock level is increasing in the EPU index (Baker, Bloom and Davis, 2016). EPU has great explanatory power for short trading. Cross-sectional tests show that the increase in short interest under high political uncertainty is from shorting stocks characterized by higher mispricing, greater policy sensitivity, higher illiquidity, greater volatility or analyst dispersion. Short sellers earn abnormal profits by trading on public information related to EPU.

애널리스트 투자의견 변경 이전의 공매도거래에 대한 양방향 분석

애널리스트 투자의견 변경 이전의 공매도거래에 대한 양방향 분석

Stock Market Liquidity and Trading Activity in China

We study marketwide liquidity and trading activity in China. Trading activity increases in up markets more than in down markets, which is consistent with the disposition effect and the large number of unsophisticated retail investors in China. Whereas, on average, liquidity and trading activity are lower around holidays, in more recent times, trading activity has been significantly lower before holidays and higher afterward. Aggregate short selling and margin trading activity boost trading activity, but short selling also increases spreads, indicating lower liquidity. We also document the increased influence of global factors in China.

Insider Selling on Public Information: Evidence from Competition with Short Sellers

This paper studies patterns of insider trading in the presence of foreknowledge of long-term material information and short-term mispricing. Using a sample of U.S. stocks in the period after increased regulatory restriction we document that both insiders' purchases and sales predict future returns. Conditioning on the short-selling activity after earnings announcements as a proxy for demand of arbitrageurs who trade to exploit short-term mispricing, we show that insiders profit from selling because of their ability to exploit mispricing after public news releases. Insiders' purchases, in contrast, do exploit insiders' foreknowledge of long-term material information. Most of the informed insider trading comes from opportunistic insider transactions. Our paper contributes to the discussion about (in)effectiveness of regulatory restrictions concerning insider trading.

The Accrual Anomaly and the Announcement Effect of Short Arbitrage

We investigate the accrual anomaly by examining the stock market reaction around the release of short interest information for firms with high accruals. We show that arbitrage activity, proxied by short interest, focuses on mispricing of firms with high accruals. In particular, we provide evidence that high accrual firms experience significant negative returns when high short interest levels are announced. In contrast, the announcement effect does not vary by short selling activity for low accrual firms. Our findings are consistent with the view that the accrual anomaly is due to overpricing.

The Determinants of Increased Short-Selling Activity

Using hedge fund assets and institutional ownership (IO) as proxies for short-selling demand and supply, this paper investigates the determinants of increased short-selling activity on the NYSE/AMEX and NASDAQ from 1988 to 2011. Hedge fund assets, IO and liquidity are significantly related to short-selling activity, and the relationships are stronger in the 2001-2011 period than in the 1988-2000 period. The ownership of short-term hold institutions has a stronger relationship with short-selling activity than ownership of long-term hold institutions. Further, both the expected and unexpected components of short selling have stronger relationships with short-term IO than with long-term IO.

Digesting the Profitability and Investment Premiums: Evidence from the Short Selling Activity

This paper highlights the effects of short selling activity on the profitability and investment premiums. Recently, Fama and French (2015) extend their three-factor asset pricing model by adding profitability and investment factors. Using short interest as a proxy to measure the short selling activity, we find that the stocks without shorting show significant higher profitability premium, while short selling activity has no impact on the investment premium. We also provide evidence that the profitability premium is more likely than the investment premium to be associated with the sentiment-driven mispricing, and short sellers are skilled at eliminating sentiment-driven mispricing. Collectively, our results suggest that the two new Fama-French factors have different underlying attributions. While the profitability premium is more consistent with cash flow-based interpretation, the investment premium is more consistent with risk-based interpretation.

Short Selling in OTC Stocks: Information or Manipulation?

We examine short selling activity in OTC stocks using short selling volume and short interest data for a period from 2009 to 2016. We find that on average short volume constitutes 48% of daily trading volume in OTC stocks. Similar to exchange traded stocks, a portfolio with short position in stocks with high short selling volume and long position in stocks with low short selling volume has significant positive returns. Surprisingly, this positive return reverses over a period of next 1-month, indicating manipulative short selling. OTC stocks have higher short selling after a period of positive returns and on days of positive returns. Unlike exchange-traded stocks, short interest does not have predictive power for future returns. Short interest increases when the return over the past 15 days is positive, but it is lower for stocks with positive return over the last 1 year.