Essays in short-selling and macroeconomic announcements

This dissertation encompasses three research papers analyzing short-selling activity around Federal Open Market Committee announcements, the longer-term effects of short-sale bans during the COVID-19 pandemic in several European countries, and the connection between firms' inflation exposure and subsequent monetary shocks. Each chapter examines one of the aforementioned topics, aiming to provide an understanding of the economic mechanisms driving the empirical results. In the first chapter, Short Sales and the Cash Flow Channel: Evidence from FOMC Announcements, I investigate short-sellers' activity around the Federal Open Market Committee (FOMC) meetings. This research finds robust evidence that positive hedging premium shocks drive a substantial increase in short volume two days before and after the FOMC announcements. Hedging premium shocks capture the cash flow risk in stocks, suggesting that these investors focus on the cash flow channel during monetary policy changes. Investors will use short-selling to hedge the cash flow risk associated with these meetings. This mechanism holds irrespective of the direction of monetary policy shifts. Furthermore, when looking at the size of the short positions, this research identifies a comparable trend to short volume. In contrast, shocks to the expectations about the overall growth in the economy influence the long trading volume, implying that the identified patterns on the short side of the equity market are unique. The second chapter, Unwinding Short-Sale Bans does not Unwind their Effects, coauthored with Christian Westheide, focuses on the longer-term effects of short-sale bans implemented by six European countries at the beginning of the COVID-19 pandemic. We base our analysis on a comparison with other European countries that share the same regulatory framework, but did not implement short-selling restrictions, using them as a control group. Empirical results demonstrate that the countries that implemented the short-sale ban experience persistent detrimental effects on market liquidity, measured by bid-ask spreads and the trading volume. Volatility remains elevated, and stock prices appear less efficient. These effects persist for several quarters after the short-sale ban ends. We find the results hold when considering distinct stringency measures implemented by different countries. Lastly, the short positions by institutional investors do not recover after the conclusion of the ban, suggesting that their absence potentially explains the prolonged effects. Our analysis provides novel evidence on the impact of short-sale bans, previously not documented in the literature.The third chapter, Firms' Inflation Exposure and Monetary Policy Shocks, coauthored with Florian Weinlich, examines the connection between firms' inflation exposure and monetary policy shocks. We determine the firm's inflation exposure by analyzing the stock price reaction to previous unexpected changes in inflation. Our results indicate that this relationship is contingent on the economic regimes. We find that after the Great Financial Crisis, stock prices of companies with higher inflation exposure experience a more substantial decline after positive monetary shocks. This relationship is further amplified during periods of high inflation, such as the COVID-19 pandemic. In contrast, we observe an inverse relationship amid periods of deflationary pressures, such as the Great Financial Crisis. These findings are consistent across daily monetary shocks and during FOMC announcements and contribute to a more comprehensive understanding of how firms respond to monetary policy changes based on their inflation exposure.