Strategic Short Selling Around Index Additions: Evidence From The Nikkei 225

Focusing on index additions, which provoke buying pressure by large investors, we analyze the trading activities of short sellers around these events. Using daily short-selling data from Japan, we find that short sellers exploit profitable opportunities through their liquidity provision activities. Short sellers earn profits by selling short right before the effective date of index additions and buying back after the effective date. The results suggest that short sellers exploit profitable opportunities due to anticipated buying pressure.