Abstract
We extract the news component of short-selling activity by accounting for important cross-sectional, distributional differences in short interest data. The resulting measure of surprise in short interest negatively predicts the cross section of both U.S. and international equity returns. Our results also indicate that this predictability originates from short sellers’ informed trading on mispricing and investors’ underreaction due to their anchoring on past short interest. Finally, consistent with the notion of costly arbitrage, the return predictability is stronger among illiquid, volatile stocks and stocks with high information uncertainty, but importantly, unrelated to short-selling frictions.
Original language | English |
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Article number | 100841 |
Journal | Journal of Financial Markets |
Volume | 65 |
DOIs | |
Publication status | Published - Sept 2023 |
Bibliographical note
Funding Information:☆ We are grateful to Tarun Chordia (the editor), two anonymous reviewers, Vikas Agarwal, Antje Berndt (discussant), Menno van Dijk, Egle Karmaziene (discussant), Tzuo-Hann Law (discussant), Martin Rohleder (discussant), Stefan Ruenzi, Daniel Schmidt, Michael Ungeheuer, Florian Weigert, and participants at the 24th Annual Meeting of the German Finance Association, the 20th Annual Conference of the Swiss Society for Financial Market Research, the 16th Cologne Colloquium on Financial Markets, the 2017 European Joint Conference of Academy of Entrepreneurial Finance and Academy of Behavioral Finance and Economics, the 5th European Retail Investment Conference (ERIC), and the seminars at the University of Mannheim, Robeco, and Quoniam Asset Management for their helpful comments and suggestions. We retain responsibility for all remaining errors. Hanauer is also employed by Robeco, an asset management firm that, among other strategies, also offers quantitative investing strategies. Lesnevski is employed by Union Investment. The views expressed in this paper are those of the authors and not necessarily shared by Robeco or Union Investment.
Publisher Copyright:
© 2023 The Author(s)