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RESEARCH PAPER NO. 869
THE IMPACT OF SHORT SELLING
ON THE PRICE-VOLUME RELATIONSHIP: EVIDENCE
FROM HONG KONG
BY
OLAN T. HENRY & MICHAEL
McKENZIE
JANUARY 2003
Department of Economics. University of Melbourne. Melbourne Victoria 3010 Australia
This paper considers the relationship
between traded volume and volatility. We
employ short sales data to discriminate
between transactions that close existing
long positions and transactions that establish
new short positions. We test for,
and where appropriate, incorporate non-linearity
and asymmetry into the modelling process.
The evidence supports a non-linear,
bi-directional relationship between volume
and volatility. The results suggest
(i) that the market displays greater volatility
following a period of short selling and
(ii) that asymmetric responses to positive
and negative innovations to returns appear
to be exacerbated by short selling.
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