Trading activities of short-sellers around index deletions: Evidence from the Nikkei 225

Focusing on index deletions, which are events strongly associated with temporal liquidity shocks, we analyze the trading activities of short sellers around these events. Using daily short selling data from Japan, we find that short sellers show trading patterns consistent with the predatory trading in Brunnermeier and Pedersen (2005). Short sellers appear to earn profits by selling short immediately after the announcement and buying back close to the effective day. We also find that intense short selling around the announcement date results in larger subsequent return reversals. The results suggest that short selling disturbs price efficiency around the index deletions.