The effect of short selling on volatility and jumps

Abstract

The evidence is mixed regarding the role of short sellers on stock market efficiency, with the majority of studies assessing short selling activities during abnormal market conditions. This study investigates the effect of short selling on stock volatility during normal market conditions in the Australian stock market using various proxies for volatility and trading activities. While short volume does not supplant the number of trades in the volume and volatility relationship, our results suggest that short selling has some incremental positive effects on volatility. Overall, our vector autoregression (VAR) analysis suggests that trading by short sellers increases volatility even during normal market conditions. JEL Classification: G10, G12, G13 Show more