Impact of Macro Indicators on Short Selling: Evidence from Tokyo Stock Exchange

1. Impact of Macro Indicators on Short Selling: Evidence from Tokyo Stock Exchange

2. ReviewQuestions Areshort-sellers in Japandifferentfromshort-sellers in the rest of theworld? Do Japaneseshortsellersprovide market liquidity in theabsence of market-makers? Why do weexpectshort sellers in Japan to pay close attention to economic fundamentals? Whichmacroeconomicindicatorsareused in thestudy? Werethererestrictionsimposed on short-sellers in Japanduringthelastcrisis in 2008? How do youevaluatetheperformance of theJapaneseeconomy in thelastdecade? What is theexpectationaboutthefuture of Japaneseexports? Why do weusethefirstdifferences of themacroeconomicseries in thisstudy? Can youexplaintheresults of theGrangerCausalityTests? What can you say aboutthelong-runrelationbetweenJapaneseshort-sellingandNikkei 225?

3. JapaneseShort-sellers Short sellers in Japan are mostly individual customers withno private information. Approximately 10% of short sellers in Japan are exchange member firms, while the rest includes customers such as foreigner investors, corporations and individual investors which consist of the majority (KoandLim, 2006).

4. Short-sellersandabnormalreturns Short-sellers can be either informed traders or uninformed hedgers/speculators. - For uninformed traders, there should not be a consistent and significant relationship between short selling and abnormal returns. - Forinformed traders, therearetwosourcesforinformationthatleadsto a consistentandsignificantrelationshipbetweenshortsellingandabnormalreturns. (a) Same set of informationusedbystockanalysttocomeupwith a list of overpricedstocks, or (b) The acquisition of private information of a stock that is not publicly available (tippinghypothesis).

5. Short-sellingrestrictions In 2008, dueto Global financialcrisis, a wave of restrictions, somebeingtemporary, areimposed on short-selling. Someexamplesare: Introduction of newregulationsforshort-selling in U.S.A. by SEC in 2005; short-term ban of shortselling in U.S.A in 2008, in U.K., and total ban in Australia. InJapan, short sales of all stocks were prohibited until March of 2009, without confirmations that shares have been borrowed. Moreover, the threshold for disclosure obligation is set to 0.25% or more of outstanding stocks. That is, nakedshortselling is prohibited.

6. JapaneseEconomy: GraphicalOverview

7. Plots of FinancialIndicators

8. ShortSellingandNikkei 225

9. Stationarity Allmacroseriesused in theanalysisandshort-sellingvolume, with the exception of the “bond yields”, have unit roots and are not stationary at levels, but the first differences of all series are stationary. Test results explicitly show that the series under examination have changing mean and/or autocorrelation over time.

10. GrangerCausality Test Results • To examine the relationship between macroeconomicvariablesandshortselling, thecausalityrelationshipbetweeninteractingvariablesareinvestigated. • Granger (1969) causality test uses a series of t-tests and F-tests to determine whether one time series is useful in predicting another time series. However, this test does not necessarily address the cause and effect relation between variables as it may not indicate true causality

11. Conclusion Volume of shortselling, Nikkei 225 index, andexchange rate haveunitroots, theyarenon-stationary but bondyield is stationary. ShortsellingandNikkei 225 indexhavethebi-directionalGrangercausality. There is no causalitybetweenshortsellingand GDP. Exchange rate grangercauseshortselling, but shortsellingdoes not Grangercauseexchange rate. ShortsellingandNikkei 225 indexhavethecointegrationrelationwhichdocumentstheexistence of permanentlong-runrelationshipbetweenthetwoseries.