Impact of macroeconomic indicators on short selling: evidence from the Tokyo stock exchange

This chapter examines the existence of cointegration between short selling volume and the Nikkei 225 Index to investigate the permanent relation between the two. For this purpose, the Japanese financial markets with monthly data from November 2005 to October 2009 were examined to document if a causality relation exists between short selling volume and macroeconomic variables, such as GDP, bond yield, and exchange rate, as well as the Nikkei 225 Index. Given the characteristics of Japanese short sellers, it is expected that a causal relationship exists between macroeconomic variables and short selling volume, which indicates that Japanese short sellers are informed traders. Based on this finding, it can also be assumed indirectly that the tipping hypothesis does not apply to Japanese short sellers. In addition, the existence of cointegration between short selling volume and the Nikkei 225 Index are investigated to determine whether a long run relationship exists between the two. The study found that the short selling volume, the Nikkei 225 Index, and the exchange rate have unit roots and are thus nonstationary; however, the bond yield rate is stationary. Using the Granger causality test, it also showed bidirectional causality between short selling volume and the Nikkei 225 Index. However, there is no causality between short selling volume and GDP, as well as bond yield rate. The findings also document that exchange rate Granger causes a short selling volume, but short selling volume does not Granger cause exchange rate. These findings thus indicate that the short sellers' information set contains the Nikkei 225 Index and exchange rate movements, but not macro fundamentals. The results also document the permanent long run relationship between short selling volume and the Nikkei 225 Index. © 2012 Elsevier Inc. All rights reserved.