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The Information Content of Short Selling before Macroeconomic Announcements

Paul Brockman, Leigh University

(Grace) Qing Hao, University of Missouri-Columbia

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Reading Questions

Is there a significant relation between short selling and the release of major economic indicators?

To what extent do short sellers use exchange traded funds (ETFs) to benefit from information advantages at the macroeconomic level?

Are short sellers able to earn abnormal returns from trading on the content of macroeconomic reports?

Are some macroeconomic reports more susceptible to short seller trading than others?

Research Design

A negative and significant relation between pre-release abnormal short selling and post-release stock returns suggests the presence of informed short selling.

We examine 10 key economic indicator reports.

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Table 1. Ten Key Economic Indicator Reports

Report code Indicator Institute Typical release date and time (ET)

EMP Employment Situation Bureau of Labor Statistics, Department of Labor

8:30 a.m. on the first Friday of each month

ISM Purchasing Managers’ Index (PMI)

Institute for Supply Management (ISM) 10:00 a.m. on the first business day of each month

M3 Manufacturers' Shipments, Inventories, and Orders

Department Commerce’s Census Bureau

The advance report on durable goods is released at 8:30 a.m. on about the 18th business day of each month

CPI Consumer Price Index (CPI)

Bureau of Labor Statistics, Department of Labor

8:30 a.m. on about the 13th of each month

GDP Gross Domestic Product (GDP)

Bureau of Economic Analysis, Department of Commerce

8:30 a.m. on the third or fourth week of the month

HOS Housing starts and building permits

Department Commerce’s Census Bureau & Department of Housing and Urban Development

8:30 a.m. on approximately the 15th day of each month

CON Consumer Confidence The Conference Board 10:00 a.m. on the last Tuesday of each month PPI Producer Price Index

(PPI)Bureau of Labor Statistics, Department of Labor

8:30 a.m. around the 11th of each month

MIC Consumer Sentiment Index

University of Michigan 9:45-10:00 a.m. on the second to last Friday of each month

RET Retail Sales The Census Bureau of the Department of Commerce

8:30 a.m. around the 13th of each month

Data

The daily short-sale data are obtained for the American Stock Exchange (AMEX), Archipelago, Boston Stock Exchange, Chicago Stock Exchange, National Association of Securities Dealers, National Association of Securities Dealers Automated Quotations (NASDAQ), National Stock Exchange (formerly known as the Cincinnati Stock Exchange), Philadelphia Stock Exchange, and New York Stock Exchange (NYSE).

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Data

Pursuant to the SEC’s Regulation SHO adopted in 2004, all the above self-regulatory organizations (SROs) made tick data on short sales publicly available starting 2 January 2005.

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Table 2. Panel A. Descriptive statistics of the sample ETFs and the short selling in these ETFs

Mean Median Maximum Minimum Std. Dev.

Market Cap ($ billion) 1,422 153 55,539 18 5,053

SS (thousand of shares) 582 9 39,681 0.5 3,742

RELSS 20% 20% 51% 3% 12%

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Table 2. Panel B. Deviation from market forecast and ETF return

(1) (2) (3) (4) (5)

Report code

Economic indicator Actual Actual- Forecast

RET0 Std. Dev. of RET0

Correlation between (2)

and (3)

EMP

Nonfarm Payrolls 139,069 -15,069 0.02% 0.76% -0.03*

Unemployment Rate 4.84% -0.05% 0.02% 0.76% -0.01

ISM ISM Index 54.43 -0.53 0.17% 0.89% -0.16***

M3 Durable Orders 0.28% -0.53% -0.17% 1.07% 0.25***

CPI Consumer price index 0.25% -0.01% 0.05% 0.97% 0.00

GDP Gross domestic product 3.01% -0.07% 0.38% 0.98% 0.00

HOS

Building Permits 1,906.34 0.14 0.31% 0.98% -0.25***

Housing Starts 1,876.34 3.41 0.31% 0.98% -0.17***

CON Consumer Confidence 103.50 1.04 -0.29% 1.06% -0.17***

PPI Producer price index 0.30% 0.04% 0.14% 0.89% -0.00

MIC Michigan Sentiment 88.23 -0.35 0.00% 0.82% 0.19***

RET Retail Sales 0.37% -0.05% -0.00% 1.01% -0.05***

Regression Results

Short sellers are able to earn abnormal returns from trading on the Employment Situation Report (Panel A of Table 3).

Short sellers are unable to earn abnormal returns from trading on the other nine macroeconomic reports (Panels A and B of Table 3).

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Table 3. Panel A. Estimation results for the Employment Situation Report and the Purchasing Managers’ Index (PMI) by the Institute for Supply Management (ISM)

EMP ISM

Equation (3) Equation (5) Equation (3) Equation (5)

Dependent Variable = ABSS ABRELSS ABSS ABRELSS

Intercept 4.97*** 3.56*** 5.40*** 3.31***

(4.17) (6.84) (3.37) (7.77)

RET0 (%) -0.27*** -0.10** -0.96 -0.10

(-2.77) (-2.04) (-1.39) (-1.45)

RET(-2,-1) (%) -0.55 -2.13 -12.52 4.48

(-0.06) (-0.63) (-0.77) (1.29)

ABVOL(-2,-1) (%) 0.74*** 0.99

(3.49) (1.44)

Log(mktcap) -0.56*** -0.40*** -0.81** -0.38***

(-3.11) (-5.99) (-2.51) (-7.00)

MOM (%) 10.43 5.02* 39.35 -0.09

(1.02) (1.47) (1.07) (-0.02)

PUT 0.12 -0.02 0.90 0.04

(-0.19) (-0.12) (1.14) (0.20)

VOLSTD 0.03* 0.03*** 0.05 0.03***

(1.92) (4.92) (1.18) (5.02)

RETSTD -64.10 -60.76** 45.67 -48.20*

(-1.01) (-2.09) (0.40) (-1.70)

N 3,752 3,752 3,652 3,652

Adj. R2 8.20% 5.12% 4.34% 4.81%

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Table 3. Panel B. Coefficient estimate on RET0 (%) for 10 economic indicators

Equation (3) Equation (5) Equation (3) Equation (5)

Dependent Variable = ABSS ABRELSS ABSS ABRELSS

M3 0.16 -0.01 GDP 0.22 0.13**

(0.84) (-0.19) (1.54) (2.08)

HOS 0.08 0.04 CON -0.15 -0.07

(0.83) (0.67) (-1.00) (-1.42)

CPI 0.17 0.04 PPI 0.12 -0.04

(1.35) (0.64) (0.68) (-0.69)

RET 0.12 0.14*** MIC -0.30* -0.02

(0.65) (3.42) (-1.85) (-0.46)

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Conclusion

Short sellers can earn abnormal returns while trading on pre-scheduled releases of macroeconomic reports.

The Employment Situation Report is arguably the most influential report among the 10 macroeconomic indicators studied herein (Yamarone, 2007).

The relative importance of this report suggests why traders might be willing to spend more resources in their attempts to predict its content.