{"id":3062,"date":"2024-01-25T17:00:00","date_gmt":"2024-01-25T17:00:00","guid":{"rendered":"https:\/\/www.tejwin.com\/en\/news\/does-short-selling-get-high-returns\/"},"modified":"2024-01-25T17:00:00","modified_gmt":"2024-01-25T17:00:00","slug":"does-short-selling-get-high-returns","status":"publish","type":"news","link":"https:\/\/www.tejwin.com\/en\/news\/does-short-selling-get-high-returns\/","title":{"rendered":"Does Short Selling Get High Returns?"},"content":{"rendered":"
\"\"<\/figure>\n

Preface<\/h2>\n

As Bobby Axelrod, the main character in the drama \u201cBillions\u201d, said \u201c short selling is just like leukocyte in the capital market. They specialize in swallowing bad companies, which can increase the efficiency of the capital market.\u201d<\/p>\n

\uff2dargin Transactions and Securities Lending are institutional arrangements that vitalize the securities market, providing investors with more diverse ways to participate. When investors have insufficient funds and are bullish on the future market, they can use \u201cmargin purchase<\/mark>\u201d to purchase securities from a securities firm; on the other hand, when investors do not have any securities and are bearish on the future market, they can use \u201cshort sale<\/mark>\u201d or \u201cborrowing\u201d to sell securities through securities financing to achieve the purpose of selling securities.<\/p>\n

Short selling is not without its benefits. According to past studies, short selling traders are usually \u201cinformed traders\u201d who are capable of identifying overestimated stocks. By shorting overvalued stocks, the prices of these stocks can be brought back to the fundamentals, thus increasing market efficiency and serving the function of price discovery. Some literature indicates that \u201cSBL Short Sale\u201d and \u201cMargin Short Sale\u201d may have different influences on stock return due to the difference of traders. Therefore, we discuss the expected return predictability of the FTSE TWSE Taiwan Mid-Cap 100 index\u2019s constituent between two short selling ways<\/span> through the research process of factor-based investing, then choose the best factor of short selling.<\/p>\n

Introduction of short selling in Taiwan<\/h2>\n

In Taiwan, there are two kinds of short selling ways, which are \u201cMargin Short Sale<\/strong><\/mark>\u201d and \u201cSBL Short Sale<\/mark><\/strong>\u201d. Most of the traders of \u201cSBL Short Sale\u201d are institutional investors<\/span>, like foreign investors, investment trusts, and dealers. Unlike SBL Short Sale, traders of \u201cMargin Short Sale\u201d are mostly individuals (retail investors) and general legal persons (general corporations)<\/span> due to the regulations. <\/p>\n

\u25ce Margin Short Sale<\/mark><\/strong>: When investor does not have any securities and are bearish on the future market, tehy can apply for securities financing from a securities dealer or a securities firm by preparing a certain amount of margin. Investors only need to return the securities within a certain period of time in the future to achieve the purpose of selling.
\u25ce <\/mark>SBL Short Sale<\/mark><\/strong><\/strong>: The lender receives a fee for borrowing securities, temporarily transfers the marketable securities to the borrower, and receives collateral. The borrower will return the securities within a certain period in the future.<\/p>\n

However, having a deal of SBL does not mean short-selling, it can be used for repayment, contract fulfillment, hedging, arbitrage and other purposes. Therefore, we only provide some empirical evidence of the \u201cSBL Short Sale\u201d to reflect the actual short-selling volume of investors. <\/p>\n

Data & Variables of Short Selling<\/h2>\n

In this article, we take the constituents of FTSE TWSE Taiwan Mid-Cap 100 index as samples. The data were taken from TEJ, and the period is from January 2013 to September 2021. Also, we treat the data properly to avoid survivorship bias and Look-ahead bias.<\/p>\n

Referring to Lee et al.(2017), we organize short-selling variables into table 1 below. Considering the amount of \u201cMargin Short Sale\u201d and \u201cSBL Short Sale\u201d will affect the volume and market value of a stock, adjusting the volume and market value or taking growth rate as a short-selling variable is necessary. For detailed variable treatment, see table 1 below.<\/p>\n

\n\n\n\n\n\n\n\n\n\n\n
Code<\/strong><\/th>\nVariable<\/strong><\/th>\nCalculation<\/strong><\/th>\n<\/tr>\n<\/thead>\n
sbls_v<\/strong><\/mark><\/td>\nRatio of SBL Short Sales amount to Trade amount(%)<\/td>\n(SBL Short Sales amount of the month\/Trade amount of the month)\u00d7100%<\/em><\/td>\n<\/tr>\n
shorts_v<\/strong><\/mark><\/td>\nRatio of Margin Short Sales amount to Trade amount(%)<\/td>\n(Short selling amount of the month\/Trade amount of the month)\u00d7100%<\/em><\/td>\n<\/tr>\n
sbls_g<\/strong><\/mark><\/td>\nGrowth rate of SBL Short Sales(%)<\/td>\n((SBL Short Sales amount of current month\/SBL Short Sales amount of previous month)-1)\u00d7100%<\/em><\/td>\n<\/tr>\n
shorts_g<\/strong><\/mark><\/td>\nGrowth rate of Margin Short Sales(%)<\/td>\n((Margin Short Sales amount of current month\/Margin Short Sales amount of previous month)-1)\u00d7100%<\/em><\/td>\n<\/tr>\n
sbls_mv<\/strong><\/mark><\/td>\nRatio of SBL Short sells balance to Market Value(%)<\/td>\n(SBL sells balance of the month\/Market Value of the month)\u00d7100%<\/em><\/td>\n<\/tr>\n
shorts_mv<\/strong><\/mark><\/td>\nRatio of Margin Short sells balance to Market Value(%)<\/td>\n(Margin Short sells balance of the month\/Market Value of the month)\u00d7100%<\/em><\/td>\n<\/tr>\n<\/tbody>\n<\/table>
Table1. Short selling Variables<\/figcaption><\/figure>\n
<\/div>\n
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Want to Obtain Comprehensive Stock Data of Short Selling?<\/p>\n

Click the Link and Exlpore More About Market Data!<\/p>\n

TEJ Market Databank<\/a><\/strong><\/div>\n<\/div>\n
<\/div>\n

Next, we organize all the descriptive statistics into table 2 below. As you can see, all the short-selling variables are positive skewness, which represents that there are stocks short sold in high volume<\/mark>. We can also discover that \u201cSBL Short Sale\u201d takes more shares than \u201cMargin Short Sale\u201d in short selling<\/mark>. We presume the reason is that <\/mark>institutional investors short sell mainly through \u201cSBL Short Sale\u201d<\/mark>.<\/p>\n

\n\n\n\n\n\n\n\n\n\n\n
\u3000<\/td>\nsbls_v<\/strong><\/td>\nshorts_v<\/strong><\/td>\nsbls_g<\/strong><\/td>\nshorts_g<\/strong><\/td>\nsbls_mv<\/strong><\/td>\nshorts_mv<\/strong><\/td>\n<\/tr>\n
Mean<\/strong><\/td>\n3.235<\/td>\n1.122<\/td>\n164.858<\/td>\n114.831<\/td>\n1.446<\/td>\n0.127<\/td>\n<\/tr>\n
Std<\/strong><\/td>\n3.149<\/td>\n1.433<\/td>\n2374.384<\/td>\n645.715<\/td>\n1.652<\/td>\n0.265<\/td>\n<\/tr>\n
Min<\/strong><\/td>\n0<\/td>\n0<\/td>\n-100<\/td>\n-100<\/td>\n0<\/td>\n0<\/td>\n<\/tr>\n
25%<\/strong><\/td>\n0.92<\/td>\n0.179<\/td>\n-50.485<\/td>\n-53.146<\/td>\n0.329<\/td>\n0.004<\/td>\n<\/tr>\n
50%<\/strong><\/td>\n2.246<\/td>\n0.601<\/td>\n0.439<\/td>\n-8.667<\/td>\n0.793<\/td>\n0.022<\/td>\n<\/tr>\n
75%<\/strong><\/td>\n4.531<\/td>\n1.506<\/td>\n102.657<\/td>\n81.183<\/td>\n1.88<\/td>\n0.111<\/td>\n<\/tr>\n
Max<\/strong><\/td>\n20.491<\/td>\n14.95<\/td>\n199062.3<\/td>\n22924.66<\/td>\n9.357<\/td>\n2.869<\/td>\n<\/tr>\n<\/tbody>\n<\/table>
Table2. Descriptive statistics of variables. Data peroid: 2013\/1-2021\/9<\/figcaption><\/figure>\n
<\/div>\n

Methodology<\/h2>\n

To understand if the short selling variables are effective factors, we take cross-sectional regression analysis and portfolio analysis as the research methodology.<\/p>\n

Cross-sectional Regression Analysis<\/h3>\n

In cross-sectional regression, we have a regression of the return rate of the next month(t) on the return rate of the current month(t+1). In table 3, among all the variables, we can see that only sbls_v has statistical significance. There is a negative relation between sbls_v and the expected return of the stock, which is predictive of the expected return on the cross-section of stocks. The others variables are statistically insignificant.<\/p>\n

\n\n\n\n\n\n
\u3000<\/td>\nsbls_v<\/strong><\/td>\nshorts_v<\/strong><\/td>\nsbls_g<\/strong><\/td>\nshorts_g<\/strong><\/td>\nsbls_mv<\/strong><\/td>\nshorts_mv<\/strong><\/td>\n<\/tr>\n
Cross-sectional Regression Coefficient Mean<\/strong><\/td>\n-0.139<\/td>\n0.071<\/td>\n0<\/td>\n0<\/td>\n-0.096<\/td>\n0.156<\/td>\n<\/tr>\n
t-value\u00a0<\/strong><\/td>\n-3.262***<\/td>\n0.334<\/td>\n0.478<\/td>\n0.376<\/td>\n-1.077<\/td>\n0.158<\/td>\n<\/tr>\n<\/tbody>\n<\/table>
Table3. Result of cross-sectional regression. Data peroid: 2013\/1-2021\/9<\/figcaption><\/figure>\n
<\/div>\n

Portfolio Analysis<\/h3>\n

As for portfolio analysis, we sort the variables by size and separate them into 5 equal-weighted portfolios, and according to the number of short selling from low to high, namely as P1, P2, P3, P4, and P5. Next, we hold it for one month and calculated the average return rate, then changed the stocks among the portfolios to see if it is monotonicity and has predictability between short selling variables and expected return. Figure 1 shows sbls_v has the best predictability, which is consistent with the result of cross-sectional regression analysis.<\/mark><\/p>\n

\"\"
Figure1. Chart of the monthly average return of P1 to P5. Data peroid: 2013\/1-2021\/9<\/figcaption><\/figure>\n

We further calculated the annualized return and compared it with the market\u2019s performance. We found that the performance of the investment factor constructed with\u00a0SBL Short Sale\u00a0is better <\/mark>than that of the investment factor constructed with Margin Short Sale.<\/mark> In addition, using sbls_v as the stock selection factor and choosing the investment group with the lowest shorting volume (P1) can obtain an annualized return that exceeds the market, which is the best investment strategy found in this study.<\/p>\n

Conclusion<\/h2>\n

Through the analysis of cross-section regression and portfolio analysis, we can have a conclusion that Ratio of SBL Short Sales amount to Trade amount (sbls_v) has a significant negative relation with the expected return, and sbls_v indeed has predictability to the expected return of the future.<\/strong><\/p>\n

In addition, the empirical result is inconsistent between the variables of \u201cSBL Short Sale\u201d and \u201cMargin Short Sale\u201d. The possible reason is that the trader of \u201clending securities\u201d are mostly institutional investors who have preferable to the constituents of FTSE TWSE Taiwan Mid-Cap 100 index. While institutional investors are generally regarded as \u201cinformed traders\u201d, the difference between traders of \u201cSBL Short Sale\u201d and \u201cMargin Short Sale\u201d could have different predictability of variables to expected return.<\/p>\n

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Taiwan stock market data, TEJ collect it all.<\/mark><\/strong><\/cite><\/p><\/blockquote>\n

Taiwan Economical Journal (TEJ)<\/mark><\/strong> has long-term cooperation with internationally renowned data providers, providing high-quality financial data for five financial markets in Asia.\u00a0Our data includes all listed companies on stock markets in Taiwan, China, Hong Kong, Japan, Korea, etc. With TEJ\u2019s assistance, you can access relevant information about major stock markets in Asia, such as securities market, enterprise operations, financials, sustainability data, etc., providing investors with timely and high-quality content! \u00a0<\/p>\n

<\/div>\n
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Want to Obtain Comprehensive Stock Data of Short Selling?
Click the Link and Exlpore More About Market Data!<\/strong><\/a><\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

In Taiwan, there are two kinds of short selling ways, which are \u201cMargin Short Sale\u201d and \u201cSBL Short Sale\u201d. This article will show your the correlation between the expected return and short selling ways.<\/p>\n","protected":false},"featured_media":3061,"template":"","tags":[50],"news_category":[9],"class_list":["post-3062","news","type-news","status-publish","has-post-thumbnail","hentry","tag-market-data","news_category-product-news"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/news\/3062","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/news"}],"about":[{"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/types\/news"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/media\/3061"}],"wp:attachment":[{"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/media?parent=3062"}],"wp:term":[{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/tags?post=3062"},{"taxonomy":"news_category","embeddable":true,"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/news_category?post=3062"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}