Common Short Selling and Excess Comovement

We show that common short sold capital can explain future four-factor excess return correlation one month ahead, controlling for many pair characteristics, including similarities in size, book-to-market, and momentum. We explore the possible explanations that could give rise to this result. Contrary to the predictions of price pressure, we find that the relationship weakens significantly with stock illiquidity. Instead, consistent with the informed trading hypothesis, the relationship is stronger when short positions originate from hedge funds, from active investors, and from short sellers with high past performance. Stocks connected by common short sellers are associated with non-transitory negative cumulative abnormal returns. Finally, we show that our results can be used to obtain diversifications benefits

Common Short Selling and Excess Comovement: Evidence from a Sample of LSE Stocks

For the period 2013–2019, and a sample of 356 LSE stocks, we find that common short sold capital is positively and significantly associated with future four-factor residual return correlation, controlling for many pair characteristics, including similarities in size, book-to-market, and momentum. The relationship disappears for illiquid stock pairs, whereas it strengthens when short positions originate from informed agents, such as hedge funds, active investors, and short sellers with high past performance. This supports the hypothesis that the relationship is driven by information, rather than by price pressure. We show that these results can be used to obtain diversification benefits

Do Interactions Between Political Authorities and Central Banks Influence FX Interventions? Evidence from Japan

In the United States, Japan and the Euro Zone, FX interventions are institutionally decided by specific political authorities and implemented by central banks on their behalf. Bearing in mind that these specific political authorities and central banks might not necessarily pursue the same exchange rates objectives, the model proposed in this paper takes account explicitly of this institutional organisation to examine its effects on FX intervention activity. The empirical relevance of our theoretical model is assessed by developing a friction model on the Japanese experience between 1991 and 2004 which reveals how the magnitude of that country’s FX interventions is the outcome of the Japanese Ministry of Finance’s trade-off between attaining its own exchange rate target and one of the Bank of Japan’s.info:eu-repo/semantics/publishe

Investigating the Relationship Between Central Bank Transparency and Stock Market Volatility in a Nonparametric Framework

This study investigates whether any non-linear relationship exists between central bank transparency and stock market variability in a non-parametric framework for a large number of countries. Our findings imply that a high level of transparency can significantly reduce historical as well as conditional stock market volatility in a non-linear manner. The negative effect of transparency on stock volatility is clearer when we move from low levels towards higher levels of transparency; this effect diminishes as long as we move to higher levels of transparency. This analysis implies that monetary authorities can contribute to equity market stability by adopting more transparent monetary policies in the early stages