An analysis of short sale and speed of price adjustment : evidence from the stock exchange of Thailand

Abstract

We examine newly emerging equity market, the Stock Exchange of Thailand (SET), since 2002 to 2009 in two main topics. First, we investigate time-of-the day short selling characteristics including short volume, short value and frequency of short sale. We find that intraday short selling patterns from SET result in W-shape. These W-shape patterns are the same for both investor types; individual and non-individual investors. This is consistent with the studies of Brock and Kleidon (1992) and Miller (1989) that there is a lot of trading at the open and close due to the inability to trade when market is closed. In addition, short sellers and short-term day trader tend to prevent holding their positions over night to avoid possible risk that occurs when market is closed. In the second part, we compare the speed of price adjustment between shortable and non-shortable stocks to new information. We apply the dynamic vector autoregressive method, introduced by Hasbrouck (1991a), to measure speed of price adjustment to firm-specific information. In addition, we utilize the Dimson beta regression and DELAY measures, introduced by Dimson (1979) and developed by Chordia and Swaminathan (2000), to evaluate the speed of price adjustment to market-wide information. We find that ability to short does not improve speed of price adjustment to both firm-specific and market-wide information. Our findings are robust in both up and down market conditions. These results are contrast to those found in a developed market (i.e., Hong Kong Stock Exchange) by Chen and Rhee (2010). We conclude that, in the SET, speed of price adjustment to new information for shortable stocks is not significantly higher than that of non-shortable stocks. The ability to short alone is not sufficient to improve the speed of price adjustment to new information. The frictions in the SET, such as high fees and lack of supply for shorting, possibly slow down the speed of price adjustment of shortable stocks to new information.