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

2. Review Questions 1. Are short-sellers in Japan different from short-sellers in the rest of the world? 2. Do Japanese short sellers provide market liquidity in the absence of market-makers? 3. Why do we expect short sellers in Japan to pay close attention to economic fundamentals? 4. Which macroeconomic indicators are used in the study? 5. Were there restrictions imposed on short-sellers in Japan during the last crisis in 2008? 6. How do you evaluate the performance of the Japanese economy in the last decade? 7. What is the expectation about the future of Japanese exports? 8. Why do we use the first differences of the macroeconomic series in this study? 9. Can you explain the results of the Granger Causality Tests? 10. What can you say about the long-run relation between Japanese short-selling and Nikkei 225?

3. Japanese Short-sellers Short sellers in Japan are mostly individual customers with no 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 (Ko and Lim, 2006).

4. Short-sellers and abnormal returns 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. - For informed traders, there are two sources for information that leads to a consistent and significant relationship between short selling and abnormal returns. (a) Same set of information used by stock analyst to come up with a list of overpriced stocks, or (b) The acquisition of private information of a stock that is not publicly available (tipping hypothesis).

5. Short-selling restrictions In 2008, due to Global financial crisis, a wave of restrictions, some being temporary, are imposed on short- selling. Some examples are: Introduction of new regulations for short-selling in U.S.A. by SEC in 2005; short-term ban of short selling in U.S.A in 2008, in U.K., and total ban in Australia. In Japan, 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, naked short selling is prohibited.

6. Japanese Economy: Graphical Overview

7. Plots of Financial Indicators

8. Short Selling and Nikkei 225

9. Stationarity All macro series used in the analysis and short-selling volume, 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. Granger Causality Test Results To examine the relationship between macroeconomic variables and short selling, the causality relationship between interacting variables are investigated. 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 short selling, Nikkei 225 index, and exchange rate have unit roots, they are non-stationary but bond yield is stationary. Short selling and Nikkei 225 index have the bi-directional Granger causality. There is no causality between short selling and GDP. Exchange rate granger cause short selling, but short selling does not Granger cause exchange rate. Short selling and Nikkei 225 index have the cointegration relation which documents the existence of permanent long-run relationship between the two series.