The goal of this thesis is to study the two key aspects of complexity of the financial system: interconnectedness and nonlinear relationships. In Chapter 1, I contribute to the literature that focuses on modelling the nonlinear relationship between variables at the extremes of their distribution. In particular, I study the nonlinear relationship between stock prices and short selling. Whereas most of the academic literature has focused on measuring the relationship between short selling and asset returns on average, in Chapter 1, I focus on studying the relationship that arises in the extremes of the two variables. I show that the association between financial stock prices and short selling can become extremely strong under exceptional circumstances, while at the same time being weak in normal times. The tail relationship is stronger for small cap firms, a result that is intuitively in line with the empirical findings that stocks with lower liquidity are more price-sensitive to short selling. Finally, results show that the adverse tail correlation between increases in short selling and declines in stock prices was not always lower during the ban periods, but had declined markedly towards the end of the analysis window. Such results cast doubts about the effectiveness of bans as a way to prevent self-reinforcing downward price spirals during the crisis. In Chapter 2, I propose a measure of interconnectedness that takes into account the time-varying nature of connections between financial institutions. Here, the parameters underlying comovement are allowed to evolve continually over time through permanent shifts at every period. The result is an extremely flexible measure of interconnectedness, which uncovers new dynamics of the US financial system and can be used to monitor financial stability for regulatory purposes. Various studies have combined statistical measures of association (e.g. correlation, Granger causality, tail dependence) with network techniques, in order to infer financial interconnectedness (Billio et al. 2012; Barigozzi and Brownlees, 2016; Hautsch et al. 2015). However, these standard statistical measures presuppose that the inferred relationships are time-invariant over the sample used for the estimation. To retrieve a dynamic measure of interconnectedness, the usual approach has been to divide the original sample period into multiple subsamples and calculate these statistical measures over rolling windows of data. I argue that this is potentially unsuitable if the system studied is time-varying. By relying on short subsamples, rolling windows lower the power of inference and induce dimensionality problems. Moreover, the rolling window approach is known to be susceptible to outliers because, in small subsamples, these have a larger impact on estimates (Zivot and Wang, 2006). On the other hand, choosing longer windows will lead to estimates that are less reactive to change, biasing results towards time-invariant connections. Thus, the rolling window approach requires the researcher to choose the window size, which involves a trade-off between precision and flexibility (Clark and McCracken, 2009). The choice of window size is critical and can lead to different results regarding interconnectedness. The major novelty of the framework is that I recover a network of financial spillovers that is entirely dynamic. To do so, I make the modelling assumption that the connection between any two institutions evolves smoothly through time. I consider this assumption reasonable for three main reasons. First, since connections are the result of many financial contracts, it seems natural that they evolve smoothly rather than abruptly. Second, the assumption implies that the best forecast of a connection in the future is the state of that connection today. This is consistent with the notion of forward-looking prices. Third, the assumption allows for high flexibility and for the data to speak for itself. The empirical results show that financial interconnectedness peaked around two main events: the Long-Term Capital Management crisis of 1998 and the great financial crisis of 2008. During these two events, I found that large banks and broker/dealers were among the most interconnected sectors and that real estate companies were the most vulnerable to financial spillovers. At the individual financial institution level, I found that Bear Stearns was the most vulnerable financial institution, however, it was not a major propagator, and this might explain why its default did not trigger a systemic crisis. Finally, I ranked financial institutions according to their interconnectedness and I found that rankings based on the time-varying approach were more stable than rankings based on other market-based measures (e.g. marginal expected short fall by Acharya et al. (2012) and Brownlees and Engle (2016)). This aspect is significant for policy makers because highly unstable rankings are unlikely to be useful to motivate policy action (Danielsson et al. 2015; Dungey et al. 2013). In Chapter 3, rather than assuming interconnectedness as an exogenous process that has to be inferred, as is done in Chapter 2, I model interconnectedness as an endogenous function of market dynamics. Here, I take interconnectedness as the realized correlation of asset returns. I seek to understand how short selling can induce higher interconnectedness by increasing the negative price pressure on pairs of stocks. It is well known that realized correlation varies continually through time and becomes higher during market events, such as the liquidation of large funds. Most studies model correlation as an exogenous stochastic process, as is done, for example, in Chapter 2. However, recent studies have proposed to interpret correlation as an endogenous function of the supply and demand of assets (Brunnermeier and Pedersen, 2005; Brunnermeier and Oehmke, 2014; Cont and Wagalath, 2013; Yang and Satchell, 2007). Following these studies, I analyse the relationship between short selling and correlation between assets. First, thanks to new data on public short selling disclosures for the United Kingdom, I connect stocks based on the number of common short sellers actively shorting them. I then analyse the relationship between common short selling and excess correlation of those stocks. To this end, I measure excess correlation as the monthly realized correlation of four-factor Fama and French (1993) and Carhart (1997) daily returns. I show that common short selling can predict one-month ahead excess correlation, controlling for similarities in size, book-to-market, momentum, and several other common characteristics. I verify the confirm the predictive ability of common short selling out-of-sample, which could prove useful for risk and portfolio managers attempting to forecast the future correlation of assets. Moreover, I showed that this predictive ability can be used to establish a trading strategy that yields positive cumulative returns over 12 months. In the second part of the chapter I concentrate on possible mechanisms that could give rise to this effect. I focus on three, non-exclusive, mechanisms. First, short selling can induce higher correlation in asset prices through the price-impact mechanism (Brunnermeier and Oehmke, 2014; Cont and Wagalath, 2013). According to this mechanism, short sellers can contribute to price declines by creating sell-order imbalances i.e. by increasing excess supply of an asset. Thus, short selling across several stocks should increase the realized correlation of those stocks. Second, common short selling can be associated with higher correlation if short sellers are acting as voluntary liquidity providers. According to this mechanisms, short sellers might act as liquidity providers in times of high buy-order imbalances (Diether et al. 2009b). In this cases, the low returns observed after short sales might be compensations to short sellers for providing liquidity. In a multi-asset setting, this mechanism would result in short selling being associated with higher correlation mechanism. Both above-mentioned mechanisms deliver a testable hypothesis that I verify. In particular, both mechanisms posit that the association between short selling and correlation should be stronger for stocks which are low on liquidity. For the first mechanism, the price impact effect should be stronger for illiquid stocks and stocks with low market depth. For the liquidity provision mechanism, the compensation for providing liquidity should be higher for illiquid stocks. The empirical results cannot confirm that uncovered association between short selling and correlation is stronger for illiquid stocks, thus not supporting the price-impact and liquidity provision hypothesis. I thus examine a third possible mechanism that could explain the uncovered association between short selling and correlation i.e. the informative trading mechanism. Short sellers have been found to be sophisticated market agents which can predict future returns (Dechow et al. 2001). If this is indeed the case, then short selling should be associated with higher future correlation. I found that informed common short selling i.e. common short selling that is linked to informative trading, was strongly associated to future excess correlation. This evidence supports the informative trading mechanism as an explanation for the association between short selling and correlation. In order to further verify this mechanism, I checked if informed short selling takes place in the data, whilst controlling for several of the determinants of short selling, including short selling costs. The results show evidence of both informed and momentum-based non-informed short selling taking place. Overall, the results have several policy implications for regulators. The results suggest that the relationship between short selling and future excess correlation is driven by informative short selling, thus confirming the sophistication of short sellers and their proven importance for market efficiency and price informativeness (Boehmer and Wu, 2013). On the other hand, I could not dismiss that also non-informative momentum-based short selling is taking place in the sample. The good news is that I did not find evidence of a potentially detrimental price-impact effect of common short selling for illiquid stock, which is the sort of predatory effect that regulators often fear. / Doctorat en Sciences économiques et de gestion / info:eu-repo/semantics/nonPublished

One of the assumptions upon which modern portfolio theory is based is the efficient market hypothesis which postulates that market prices fully reflect all available information, which implies that an abnormal return cannot be made. Evidence has amassed in contradiction to the efficient market hypothesis as demonstrated by Jegadeesh and Titman (1993); Mohanram (2005); Montier (2009) and Piotroski, (2000). However these studies demonstrated earning an abnormal return by buying an asset as opposed to selling an asset. Evidence by Altman (2000) and Beneish, Lee and Nichols (2013) affirmed that abnormal returns may be earned by selling a declining asset. There has been no published work conducted on the South African market pertaining to an instrument that may be used to detect a decline in share price due to prior earnings manipulation, thereby providing the scope of this research. In recent years the focus of the discipline of asset pricing has shifted away from theoretical modelling towards empirical analysis. The C-score by Montier (2008) is a binary earnings manipulation detection model, designed to identify stocks that may be shorted for an abnormal return. An exploratory study of stocks on the Johannesburg Stock Exchange (JSE) from 2002 to 2010 was conducted. Vital focus areas included the resources and industrials sector. Results of this research prove that C-score is insufficient as a stand-alone tool for detecting shortable stocks on the JSE. Whilst negative relative returns were earned for certain holding periods of certain sectors, a consistent trend could not be isolated. / Dissertation (MBA)--University of Pretoria, 2013. / pagibs2014 / Gordon Institute of Business Science (GIBS) / MBA / Unrestricted

Dans le premier chapitre, j'examine si les vendeurs à découvert sont mieux informés à propos des enchères d'obligation souveraines que le marché. Je trouve, en moyenne, une forte augmentation de la demande de vente à découvert avant les enchères. Néanmoins, la demande de vente à découvert ne prédit pas une augmentation future du rendement. Les vendeurs à découvert ne sont donc pas mieux informés sur le résultat des enchères et n'interprètent pas mieux que le marché.Dans le second chapitre, je développe et teste un modèle expliquant la baisse graduelle des prix observée dans les jours qui conduisent à des ventes anticipées d'actifs telles que les enchères du Trésor. Dans le modèle, les investisseurs averses au risque anticipent une vente d'actifs dont l'ampleur − et donc le prix − sont incertains. Je montre que les investisseurs font face à un compromis entre se hedger au moyen d'une position longue et spéculer sur la différence entre le prix avant la vente et le prix espéré de vente. En raison du hedging, le prix d'équilibre est supérieur au prix de vente espéré. À l'approche de la date de vente, l'incertitude quant au prix de vente diminue, les positions spéculatives à découvert augmentent et le prix diminue. Conformément aux prédictions, je trouve que le rendement des bons du Trésor italien augmente de 1,2 points de base après la publication d'informations sur le prix d'enchère, par rapport aux jours sans information.Dans le troisième chapitre, j'étudie le lien entre les prix et les taux repo au cours de la crise des subprimes. Je trouve que la relation de non-arbitrage entre les prix et les taux repo de Duffie (1996) performe moins bien pendant la crise. Cependant, les obligations à faible taux repo ont 18.0% plus de chance d'être plus coûteuses que les obligations identiques à taux repo élevé lors de la crise, contre seulement 9.0% avant la crise. Dans l'ensemble, bien qu'il existe de fortes limites à l'arbitrage, les prix et les taux repo présentent des co-mouvements plus importants pendant la crise. / In the first chapter, I ask if short-sellers are superiorly informed about sovereign auctions. I find a large average increase in demand for short-selling prior to auctions. Yet, the demand for short-selling a bond does not predict a subsequent increase in the bond's yield. Overall, there is no evidence that short-sellers predict or interpret auction outcomes better than the market.In the second chapter, I develop and test a model explaining the gradual price decrease observed in the days leading to large anticipated asset sales such as Treasury auctions. In the model, risk-averse investors anticipate an asset sale which magnitude, and hence price, are uncertain. I show that investors face a trade-off between hedging the price risk with a long position, and speculating on the difference between the pre-sale and the expected sale prices. Due to hedging, the equilibrium price is above the expected sale price. As the sale date approaches, uncertainty about the sale price decreases, short speculative positions increase and the price decreases. In line with the predictions, I find that the yield of Italian Treasuries increases by 1.2 bps after the release of auction price information, compared to non-information days.In the third chapter, I study the link between prices and repo rates during the subprime crisis. I find that the no-arbitrage relationship between prices and repo rates in Duffie (1996) fares worse during the crisis. However, low-repo-rate bonds have an 18.0% higher probability of being more expensive than identical high-repo-rate bonds during the crisis, compared to only 9.0% before the crisis. Overall, while there are high limits of arbitrage, prices and repo rates feature larger co-movements during the crisis.

In the first essay, we study mutual funds' voting on compensation-related proposals initiated by corporate management. Compared with proposals on other topics, proposals on compensation issues are more likely to be challenged by mutual funds. Consistent with active institutional influence, mutual funds are more likely to vote against management at portfolio firms that make more excess CEO pay or depict other symptoms of poor governance such as bad performance and CEO entrenchment. Both active and passive funds' votes are significant drivers of the voting outcome of a proposal. Failed proposals are associated with lower CEO pay, especially excess pay, in the following year. Say-on-pay proposals opposed by more mutual funds are also followed by lower excess CEO pay. Collectively, evidence in this paper suggests that institutions (including passive institutions) play an important role in setting CEO pay through the voting channel. The second essay examines the equity loan supply for short selling. Using detailed stock lending data, we show that active equity funds, on average, are informed, stock lenders. The stocks they lend outperform those that they do not. The stocks they recall and sell perform worse in the future than those that remain on loan. These funds avoid lending stocks when lending fees are extremely high and use the shorting market's signals to form stock-selling decisions. Our findings help explain why institutional investors lend stocks. They also highlight a new source of short-sale constraints arising from the informed loan supply. / Doctor of Philosophy / Shareholders of a firm are expected to monitor executive compensation. Among all share-holders, institutional investors such as mutual funds play an important role in setting pay practices for executives. However, do they vote on related proposals at annual meetings or simply "vote by feet"? The first essay strives to answer the question using mutual fund proposal vote records data. Our findings suggest that mutual funds can affect CEO compensation in the future by voting against management-initiated pay proposals and the effect is both statistically and economically significant. Institutional investors such as mutual funds also participate in lending business on otherwise idle shares in their portfolio. While they are often considered passive and not informed in the equity loan market, their behavior has been much less investigated. We study the extent to which mutual funds exploit information in lending their shares using the first detailed stock lending dataset obtained from SEC filings. We find that mutual funds are informed lenders and important to market efficiency.

Yes / The increased equity lending supply (ELS) in the equity loan market, available for short sellers to borrow, exposes a firm to greater short selling threats. Considering short sellers’ strong incentives to uncover firm-specific information and monitor managers, we hypothesize that short selling threats, proxied by ELS, enhance corporate investment efficiency. We find that ELS significantly reduces managerial tendencies to underinvest (overinvest) especially for firms prone to underinvest (overinvest). The effect of ELS on investment efficiency is stronger for firms with higher information asymmetry and weaker corporate governance, confirming short sellers’ role in mitigating information and agency costs. However, short selling risk weakens the effect of ELS. Our evidence is robust to endogeneity checks and suggests that corporate investment can be driven by a particular capital market condition: the amount of lendable shares in the equity loan market.

Die Arbeit stellt die wirtschaftlichen Auswirkungen von Aktienleerverkäufen auf die Liquidität, die Preisfindung und auf die Volatilität von Aktienmärkten dar. Zudem werden die nach der Finanzmarktkrise 2008 in den USA und in Deutschland und in Großbritannien erlassenen Leerverkaufsregulierungen untersucht. Ein Schwerpunkt der Arbeit liegt auf der Analyse der aktuellen US-Leerverkaufsgesetzgebung sowie der europäischen Leerverkaufsverordnung (EU) 236/2012. / This thesis analyses the economic impact short selling has on liquidity, price formation and volatility of stock markets. Moreover it thoroughly describes the regulatory measures that were taken with regard to short selling in the United States, in Germany and in Great Britain after the financial crises in 2008. The main focus of this thesis is on the current short selling regulation in the US and on the European Short Selling Directive EU 236/2012

Financial Market Regulation in the Czech Republic with a Focus on the Securities Market ABSTRACT: The financial markets constitute a foundation of every market economy and in recent years their regulation is becoming increasingly relevant for political-legislative decision- making process (mainly as result of the last world financial and economic crisis). This Master's thesis focuses on the securities market regulation in Czech Republic and its main purpose is to evaluate this regulation, primarily its development and impacts on the market as a whole, on an individual issuer of a security or (as the case may be) on an investor as well. The thesis itself is divided into five parts. The first one represents a theoretical introduction to the financial markets and analyses basic terms, financial market functions and structure. The second, third and fourth chapters deal with crucial entities influencing the securities market - a regulated market organizer, an investment firm, investment intermediaries and a multi-sided trading system organizer. Chapters especially strive to compare contemporary legislation with legislation as amended by the Act No. 204/2017 Sb., which generally comes into force January 3rd 2018 and which transposes important European secondary legislation regulations, such as Directive...

Sammanfattning Uppsatsens titel: 2013 – Året det vårades för blankning Datum: 2013-05-21 Uppsats nivå: Kandidatuppsats i Företagsekonomi (61-90 hp) Författare: Erik Alvarado och Billy BengtssonHandledare: Sven-Ola CarlssonExaminator: Marita Blomkvist Nyckelord: Blankning, Förbud, Regleringar, Effektiva marknadsteorin, Behavioral finance, Strategi Syfte: Vårt syfte med uppsatsen är att förstå och analysera hur mäklarna samtförvaltare på svenska finansiella institut arbetar med blankning gentemotsina kunder idag. Problemformulering: Hur arbetar mäklare och förvaltare på svenska finansiella institut medblankningsaffärer åt sina kunder?Metod: Metodvalet föll på en kvalitativ studie med en induktiv ansats. Den datasom utgör empirin har samlats in genom besöks- och telefonintervjuer. Teori: I november 2012 valde regeringen att gå EU:s linje och börja följa derasförordning angående regleringar mot blankning. Detta ställer krav på attFinansinspektionen publicerar gårdagen genomförda blankningsaffärermorgonen efter. Något som lett till en mediedebatt kring att intresset förblankning kan öka, då investerare nu kan ta rygg på andra blankare.Blankning kan vara ett populärt investeringsalternativ utifrån ett flertalstrategier medan anledningarna till att blanka kan vara många. Antingen blankar investerare utifrån rationella värderingar och tillgången på informationsom finns på en effektiv marknad. Vidare kan du utgå ifrån känsloinpulser,något som kan kopplas till behavioral finance-perspektivet. Empiri: Primärdata har samlats in från fyra svenska finansiella institut: AvanzaBank, Handelsbanken, Skandinaviska Enskilda Banken och Simplicity AB. Resultat: Intresset för blankning bland de finansiella institutens kunder är relativtsvalt, något som främst beror på en lång teknisk process och höga kostnader.En slutsats som ligger helt i linje med den ledande teorin kring regleringaroch förbud mot blankning, nämligen Diamond-Verrecchia hypothesis. / Abstract Title: 2013 – Sweden, it’s time for short-selling! Date: 2013-05-21 Level: Bachelor Thesis in Business Administration (61-90 hp) Authors: Erik Alvarado and Billy BengtssonAdvisor: Sven-Ola CarlssonExaminer: Marita Blomkvist Keywords: Short-selling, Ban, Regulations, Efficient-market hypothesis, Behavioralfinance, Strategy Purpose: Our purpose with the thesis is to understand and analyze how brokers andequity managers in Swedish financial institutions working with shortsellingtowards their customers.Research question: How do brokers and equity managers at Swedish financial institutionswork with short-selling for their customers? Methodology: The thesis is based on a qualitative methodology with an inductive approach.The primary data has been collected through face-to-face interviewsas well over telephone. Theory: Since November 2012 the Swedish government is following the currentEU regulation against short-selling. The EU regulation requires that completedshort sales are published the next day on the Swedish comparison tothe U.S: Securities and Exchange Commission (SEC), Finansinspektionen.The new regulation his risen a debate in media, since investors now canfollow the published short sales. Short-selling can be a popular alternativefor investors, since there are many strategies that are including shortselling.However, the reasons for investors to short-sell can be many. Either the investors’ decision is rationally based on the available informationon the efficient market or they base their decisions on feeling. Financialdecision based on feelings can be explained by behavioral finance. Empiric: The primary data representing the empirical framework has been collectedfrom four Swedish financial institutions: Avanza Bank, Handelsbanken,Skandinaviska Enskilda Banken and Simplicity AB. Result: At the moment short-selling is not the most popular choice for investorswho are interested in going short. The short-selling process is at the momenttechnical difficult and costly for the investors and financial institutions.The result is in line with the leading theory of short-selling regulations,the Diamond-Verrecchia hypothesis.

Submitted by CAROLINA MIYUKI UJIKAWA (carol.ujikawa@gmail.com) on 2015-02-26T02:17:31Z No. of bitstreams: 1 Dissertação_Carolina Miyuki Ujikawa_versao final.pdf: 974841 bytes, checksum: fdd390902290734f710cdb223c10ecec (MD5) / Approved for entry into archive by Renata de Souza Nascimento (renata.souza@fgv.br) on 2015-02-27T00:24:41Z (GMT) No. of bitstreams: 1 Dissertação_Carolina Miyuki Ujikawa_versao final.pdf: 974841 bytes, checksum: fdd390902290734f710cdb223c10ecec (MD5) / Made available in DSpace on 2015-02-27T12:58:31Z (GMT). No. of bitstreams: 1 Dissertação_Carolina Miyuki Ujikawa_versao final.pdf: 974841 bytes, checksum: fdd390902290734f710cdb223c10ecec (MD5) Previous issue date: 2015-01-27 / The aim of this study is to test whether, in the Brazilian market, family firms are more susceptible to insider trading. Tests done in US market demonstrated the effect of family control in informational content of short sales in publicly-traded companies. There, had found higher than normal levels of short sales in family controlled companies, mainly in times that anticipated negative earnings announcements. We did not find clear evidence that the fact that the company has family control could take it to submit or not insider trading, since for limitation of the model is not possible to compare the abnormal level of short sales for family-controlled companies and others, since this variable it is removed from the model. However, we observed in the fixed panel models with interactions that there are differences in the effect of some control variables for family-controlled companies or not on other variables of control, which could show that some influence the parental control could have on insider trading. We also tested whether state-controlled companies show more abnormal average daily short sales in moments that precede earnings surprises, and we did not find clear and direct evidence that this happened. / O objetivo desse trabalho é testar se no mercado brasileiro, empresas familiares são mais suscetíveis a insider trading.Testes feitos no mercado americano evidenciaram efeito do controle familiar no conteúdo informacional embutido em montagem de posições vendidas de companhias abertas. Lá, foram encontrados níveis acima do normal de posições short em companhias de controle familiar principalmente em momentos que antecipavam resultados negativos que iriam ser publicados. Não encontramos evidências claras de que o fato da companhia ter controle familiar poderia levá-la a apresentar ou não insider trading, já que por limitação do modelo não é possível comparar o nível de anormal short para empresas de controle familiar e outras pois essa variável é excluída do modelo. Entretanto, observamos nos modelos em painel fixo com interações que existe diferença do efeito de algumas variáveis de controle para empresas de controle familiar ou não sobre outras variáveis de controle o que poderia mostrar que alguma influência o controle familiar poderia ter sobre o insider trading. Testamos também se empresas de controle estatal apresentavam maior volume médio diário anormal de posições vendidas em momentos que antecediam surpresas de resultado, e também não encontramos evidências claras e diretas que isso acontecia.

This study has examined the ten most shorted shares belonging to the Swedish Stockholm Stock Exchange's Large Cap list, by following randomly selected financial institutions that have chosen to take short positions. The purpose of the study is to investigate whether it is possible for short sellers to generate an excess return compared to the index OMXS30GI. The theory is mostly about short selling in general, efficient market hypothesis, behavioral finance, opponents of short selling, technical analysis of an index and the theory also includes previous research regarding short selling. The method used is based on collected secondary data from different databases. Via the secondary data, we have artificially followed randomly selected financial institutions that have glossed over and done the same as them to see if it can generate an excess return. In this study we will not take the cost associated with short selling into account which normally would be costs as margin interest, stock borrowing costs and commissions to brokers. The results show that it is possible for short sellers to generate an excess return that outperforms index OMXS30GI. We can also conclude that short sellers follow a pattern that indicates that they do not act in a way to destroy market efficiency and we can question whether the market is efficient or not.