Price discovery in the CDS market: the informational role of equity short interest

This paper documents a negative relation between equity short interest and future returns on credit default swaps (CDS). This relation is most consistent with the theory that equity short interest telegraphs relevant information to secondary market CDS investors about credit spread not transmitted into prices in other ways. The CDS return predictive pattern also strengthens negatively for equity short-interest positions subject to an outward shift in the demand for shortable stocks, which we view as a proxy for the expected benefits of private information (Cohen et al. in J Finance 62(5):2061–2096, 2007). This suggests that features of the shorting market may help explain the lagged response of CDS spreads to equity short interest. Our tests of economic significance, however, do not support the view that the CDS return predictive pattern is strong enough to cover the round-trip cost of trading in the secondary CDS market.     

Is information risk priced? Evidence from abnormal idiosyncratic volatility

We propose a new, price-based measure of information risk called abnormal idiosyncratic volatility (AIV) that captures information asymmetry faced by uninformed investors. AIV is the idiosyncratic volatility prior to information events in excess of normal levels. Using earnings announcements as information events, we show that AIV is positively associated with informed return run-ups, abnormal insider trading, short selling, and institutional trading during pre-earnings-announcement periods. We find that stocks with high AIV earn economically and statistically larger future returns than stocks with low AIV. Taken together, our findings support the notion that information risk is priced.     

卖空限制与收益可预测性——A股融资融券制度的证据

基于A股市场融资和融券余额的巨大差距,本文拓展了Hong et al.(2016)的理论模型,在融券端和融资端分别找到了影响股票收益率的变量:融券比率(融券余额/流通市值)和融资回补天数(融资比率/日均换手率)。进一步,本文利用组合价差法和Fama-MacBeth横截面回归法,实证检验了A股市场中融券比率与融资回补天数解释和预测股票收益率的能力。实证结果表明,在存在融券限制条件下,融券比率相比融券回补天数(融券比率/日均换手率)能更好地代表套利者对股票价格高估程度的看法,根据融券比率构建的等权重多空组合能带来月均1.58%的显著收益;而由于融资约束相对较少,融资回补天数相比融资比率(融资余额/流通市值)能更好地代表套利者对股票价格低估程度的看法,根据融资回补天数构建的等权重多空组合能带来月均1.28%的显著收益。实证结果与本文存在融券数量限制下的理论模型相符,且该收益率不能被多因子模型和常规股票特征所解释。     

Can Short Restrictions Actually Increase Informed Short Selling?

We use the 2008 short selling regulations to test whether short sale restrictions can increase informed short selling. For the preborrow requirement, we find more negative price reactions to short interest announcements though no reliable increase in the price impact of short sales volume. For the stocks with banned short sales, we find an increase in the price impact of short sale volume though no reliable change in the price reaction to short interest announcements. Both restrictions, however, are associated with increased informed trading. Our results suggest that short restrictions will not reduce informed short selling and may actually result in an increase by increasing the proportion of informed short sellers..     

卖空限制与收益可预测性——A股融资融券制度的证据

基于A股市场融资和融券余额的巨大差距,本文拓展了Hong et al.(2016)的理论模型,在融券端和融资端分别找到了影响股票收益率的变量:融券比率(融券余额/流通市值)和融资回补天数(融资比率/日均换手率)。进一步,本文利用组合价差法和Fama-MacBeth横截面回归法,实证检验了A股市场中融券比率与融资回补天数解释和预测股票收益率的能力。实证结果表明,在存在融券限制条件下,融券比率相比融券回补天数(融券比率/日均换手率)能更好地代表套利者对股票价格高估程度的看法,根据融券比率构建的等权重多空组合能带来月均1.58%的显著收益;而由于融资约束相对较少,融资回补天数相比融资比率(融资余额/流通市值)能更好地代表套利者对股票价格低估程度的看法,根据融资回补天数构建的等权重多空组合能带来月均1.28%的显著收益。实证结果与本文存在融券数量限制下的理论模型相符,且该收益率不能被多因子模型和常规股票特征所解释。     

The costs and benefits of short sale disclosure

In this study, we examine the impact of a market-wide mandatory disclosure policy on short selling on the Tokyo Stock Exchange. We find that average short selling slightly declined while investors’ shorting strategies changed significantly in response to the disclosure. Previously highly shorted stocks were shorted less and shorting activity shifted toward smaller and riskier stocks, suggesting that retail investors became the more likely short sellers. Short sales became more trend-chasing, prices became less informative, and short-term price volatility increased. Overall, the pricing efficiency benefits of short selling declined after the mandatory disclosure policy.     

Against the tide: the commencement of short selling and margin trading in mainland China

China's recent removal of short‐selling and margin trading bans on selected stocks enables testing of the relative effect of margin trading and short selling. We find the prices of the shortable stocks decrease, on average, relative to peer A‐shares and cross‐listed H‐shares, suggesting that short selling dominates margin trading effects. Contrary to the regulators' intention and recent developed market empirical evidence, liquidity declines and bid‐ask spreads increase in these shortable stocks. Consistent with Ausubel (1990), these results imply that uninformed investors avoid the shortable stocks to reduce the risk of trading with informed investors.     

Capitalizing on Catastrophe: Short Selling Insurance Stocks Around Hurricanes Katrina and Rita

We develop several hypotheses regarding short‐selling activity around Hurricanes Katrina and Rita. We find that abnormal short selling does not increase until 2 trading days after the landfall of Katrina and that short‐selling activity is much more significant around Rita. We find a substantial increase in short‐selling activity in the trading days prior to the landfall of Rita and relatively less short‐selling activity in the trading days after landfall. There is little evidence that suggests that traders short insurance stocks with more potential exposure in the Gulf region than other insurance stocks in the days before landfall.     

Short-selling,margin-trading,and stock liquidity: Evidence from the Chinese stock markets

This paper examines the impacts of two forms of leveraged trading—margin trading and short selling—on the trading liquidity of individual stocks in China. We find that trading liquidity for relevant stocks generally improves after restrictions on leveraged trading are removed. However, margin trading and short selling have opposite impacts on liquidity. During ordinary periods, margin trading benefits liquidity, whereas short selling damages liquidity; however, during market downturns, their roles are reversed. We also provide evidence suggesting that short sellers are informed traders in China and that short selling reduces stock liquidity because of the increased risk of adverse selection faced by uninformed traders.     

The Impact of Changes in the FTSE 100 Index

This paper investigates FTSE 100 index membership changes, which are determined quarterly by market capitalization and should have no information content. Return reversal around index additions and deletions suggests that buying (selling) pressure moves prices temporarily away from equilibrium, consistent with short‐term downward sloping demand curves. In contrast to widely reported results for the S&P 500, there is no evidence of permanent price effects. Further results suggest that investor awareness and monitoring due to index membership do not explain the price effects. There is statistically significant anticipatory trading in stocks that just fail to be promoted to the FTSE 100.     

Are investors consistent in their trading strategies? An examination of individual investor-level data

While it has been demonstrated that momentum or contrarian trading strategies can be profitable in a range of institutional settings, less evidence is available concerning the actual trading strategies investors adopt. Standard definitions of momentum or contrarian trading strategies imply that a given investor applies the same strategy to both their buy and sell trades, which need not be the case. Using investor-level, transaction-based data from China, where tax effects are neutral, we examine investors' buy-sell decisions separately to investigate how past returns impact differentially on the trading strategies investors adopt when buying and selling stock. After controlling for a wide range of stock characteristics, extreme price changes and portfolio value, a clear asymmetry in trading is observed; with investors displaying momentum behavior when buying stocks, but contrarian behavior when selling stocks. This asymmetry in behavior is not driven purely by reactions to stock characteristics or extreme stocks. We discuss behavioral and cultural explanations for our findings.     

Informed short sales and option introductions

This study examines how the introduction of options affects the level of informed short selling. In particular, we test whether option introductions increases or decreases the level of informed short selling. Our tests are motivated by a theoretical debate in the literature. The first stream of literature argues that introducing options into markets may increase speculative trading which can result in less informed trading when informed traders perceive speculative trades as noise. The second stream argues that introducing options into markets improves the informational environment of the market because option prices provide an additional information mechanism for informed traders. We approximate informed short selling by examining (i) non-exempt short sales, (ii) contrarian short-selling activity, and (iii) the return predictability contained in shorting activity. Results show that non-exempt shorting activity increases after options become available. Further, we show that both the level of contrarian short selling and the return predictability contained in short selling increase after options are listed. Our results suggest that informed short selling increases after options are introduced.     

Banks, Bears, and the Financial Crisis

We test whether short selling is destabilizing comparing distressed financial firms to other firms using NYSE transactions records covering 4 years including the recent financial crisis. Aggressive short-selling is sometimes destabilizing by some measures, but its impact is small, vanishes quickly, is not necessarily larger for distressed firms or during the crisis, and is accompanied by other stabilizing effects. The evidence does not validate theoretical predictions from models of destabilizing speculative or predatory trading. Aggregate short-selling is largely unrelated to market-wide investor sentiment, credit risk, and ex ante volatility. Aggressive liquidation of long positions typically has more impact than short selling. Thus, the data cannot justify the restrictions on short sales of financial stocks imposed in September 2008.     

Retail investors exonerated: the case of the January effect

We dispel the belief that the January effect is due to retail investor trading. Previous studies suggest that retail investors, affected by behavioural biases and disproportionally invested in small capitalization stocks, are the source of the January effect. Furthermore, the literature regards retail investor trading and the tax‐loss selling hypothesis as essentially the same explanation. We separate tax implications and market capitalization to show that retail traders are not the cause of the January effect. Our study is an important direct test of whether retail trading causes market anomalies.     

The role of future economic conditions in the cross-section of stock returns: Evidence from the US and UK

Our study investigates the explanatory power of future economic conditions on individual stock returns in the US and UK equity markets. We analyse a new trading strategy that is based on rational forecasts of future real activity. In addition, we specifically examine the performance of this trading strategy applied to two different classifications of stocks – procyclical stocks and countercyclical stocks. Our findings indicate a strong persistence in the relationship between returns on pro-cyclical stocks and the business cycle. However, such persistence is not present when moving to counter-cyclical stocks in the US and the UK. From this we suggest that US and UK equity investors who predict future real activity accurately can improve their investment profitability by longing pro-cyclical stocks when they expect future economic conditions to be above the long-run trend and shorting those stocks when future activity is anticipated to be below the steady state.     

Effect of the ban on short selling on market prices and volatility

We examine the effects of the short‐selling ban, imposed by Australian regulators in the wake of the global financial crisis, on the trading of financial stocks. Our findings argue against commonly stated reasons for imposing short‐sale bans. We find no evidence that short‐sale restrictions provide support for stock prices or that they reduce volatility. Moreover, stocks subject to the short‐selling ban suffered a severe degradation in market quality. Controlling for the adverse effects of the financial crisis on markets, we show that short‐selling restrictions increase intraday volatility, reduce trading activity and increase bid–ask spreads.     

Early Movers Advantage? Evidence from Short Selling during After‐Hours on Earnings Announcement Days

We examine short sellers’ after‐hours trading (AHT) following quarterly earnings announcements released outside of the normal trading hours. Our innovation is to use the actual short trades immediately after the announcements. We find that on these earnings announcement days, there is significant shorting activity in AHT relative to shorting activity both during AHT on nonannouncements days and during regular trading sessions around announcements. Short sellers who trade after‐hours on announcement days earn an excess return of 0.82% and 1.40% during before‐market‐open (BMO) and after‐market‐close (AMC)sessions, respectively. The magnitude of these returns increases to 1.48 (3.92%) for BMO (AMC) earnings announcements with negative surprise. We find that the reactive short selling during AHT has information in predicting future returns. Short sellers’ trades have no predictive power if they wait for the market to open to trade during regular hours. In addition, we find that the weighted price contribution during AHT increases with an increase in after‐hours short selling. Overall, our results suggest that short sellers in AHT are informed. Our findings remain robust using alternative holding periods and after controlling for macroeconomic news announcements during BMO sessions.     

中国式卖空机制与高管减持——基于融资融券分步扩容的准自然实验

本文以我国的融资融券制度为背景,结合双重差分模型,研究卖空机制对上市公司高管减持行为的影响。研究发现,相对于非融券标的,可融券标的公司高管的月减持比例在允许卖空后下降22%,这种抑制作用在小规模、高盈余平滑度以及非国有公司中体现得更为明显。其次,成为可融券标的后,股价定价效率提高,高管减持收益显著下降。进一步地,本文将高管的减持行为分为定期性与投机性两类,发现卖空机制显著抑制了高管基于信息优势和股价偏差的投机性减持行为。     

Changing the rules again: Short selling in connection with public equity offers

We study the impact of two recent regulations that impose restrictions on short selling. First, since October 2007 any investor that short sells a firm’s stock is prohibited from purchasing shares in the firm’s seasoned equity offering (SEO) if the short occurred in the five days prior to the offering (pursuant to an amendment to Rule 105). Previously Rule 105 only disallowed investors from covering a pre-issue short sale with shares purchased in the offering. We hypothesize that the amended rule has the unintended consequence of greater discounting for overnight offers, which are not announced in advance, because the rule excludes some potential buyers and thereby forces underwriters to set lower offer prices to fully distribute the offer. The evidence supports this hypothesis. Second, we examine the impact of the SEC’s 2008 Emergency Order that greatly curtails naked short selling on all stocks under its jurisdiction. We find that the Emergency Order is associated with large increases in discounting for offers announced in advance, suggesting that the removal of naked short sellers is associated with reduced pre-SEO pricing efficiency. Taken together, the results imply that recent restrictions on short selling have significant unintended effects on the capital raising process.     

A profitable trading and risk management strategy despite transaction costs

We present a new profitable trading and risk management strategy with transaction cost for an adaptive equally weighted portfolio. Moreover, we implement a rule-based expert system for the daily financial decision-making process using the power of spectral analysis. We use several key components such as principal component analysis, partitioning, memory in stock markets, percentile for relative standing, the first four normalized central moments, learning algorithm, and switching among several investment positions consisting of short stock market, long stock market and money market with real risk-free rates. We find that it is possible to beat the proxy for the equity market without short selling for 168 S&P 500-listed stocks during the 1998–2008 period and 213 Russell 2000-listed stocks during the 1995–2007 period. Our Monte Carlo simulation for both the various set of stocks and the interval of time confirms our findings.