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Shorting flows and return predictability in Taiwan

Author

Listed:
  • Lin, Chaonan
  • Ho, Hsiao-Wei
  • Ko, Kuan-Cheng

Abstract

Wang et al. (2020) show that short- and long-term shorting flows are strong predictors of future stock returns in the U.S. markets during 2010–2015. Their results are in line with the informed shorting hypothesis that short sellers trade on long-term information that is gradually incorporated into stock prices. This study extends Wang et al.'s (2020) analyses to the Taiwan stock market by proposing that the impositions of the up-tick rule and price limits provide an ideal setting to test the informed shorting hypothesis. We show that short- and long-term shorting flows have strong predictive power for future stock returns in Taiwan, suggesting that short sellers' trading does contain significant incremental information about future stock returns under the restrictions of the up-tick rule and price limits.

Suggested Citation

  • Lin, Chaonan & Ho, Hsiao-Wei & Ko, Kuan-Cheng, 2023. "Shorting flows and return predictability in Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    • Handle: RePEc:eee:pacfin:v:77:y:2023:i:c:s0927538x22001111
    DOI: 10.1016/j.pacfin.2022.101816
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    References listed on IDEAS

    as
    1. Karl B. Diether & Kuan-Hui Lee & Ingrid M. Werner, 2009. "Short-Sale Strategies and Return Predictability," The Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 575-607, February.
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    More about this item

    Keywords

    Short sale; Shorting flow; Real-time disclosure; Return predictability; Taiwan stock market;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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