RFS Advance Access published online on May 9, 2008
Review of Financial Studies, doi:10.1093/rfs/hhn047
Short-Sale Strategies and Return Predictability
Fisher College of Business, The Ohio State University
Rutgers Business School, Rutgers University, and Korea University Business School
Address correspondence to Karl B. Diether, Fisher College of Business, The Ohio State University, 2100 Neil Avenue, Columbus, OH 43210; telephone: (614) 272-6182, fax: (614) 292-2418; e-mail: diether_1{at}fisher.osu.edu.
JEL Classification: G12, G14
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Abstract |
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We examine short selling in US stocks based on new SEC-mandated data for 2005. There is a tremendous amount of short selling in our sample: short sales represent 24% of NYSE and 31% of Nasdaq share volume. Short sellers increase their trading following positive returns and they correctly predict future negative abnormal returns. These patterns are robust to controlling for voluntary liquidity provision and for opportunistic risk-bearing by short sellers. The results are consistent with short sellers trading on short-term overreaction of stock prices. A trading strategy based on daily short-selling activity generates significant positive returns during the sample period.
We are grateful for comments from Leslie Boni, Frank DeJong, Rudi Fahlenbrach, Frank Hatheway, David Musto, Alessio Saretti, Lakshmanan Shivakumar, René Stulz, and seminar participants at the Ohio State University, the University of Georgia, the Institute for International Economic Studies, the Darden School at the University of Virginia, and Rotman School at the University of Toronto, as well as participants at the NBER Market Microstructure Group, the 2006 Swedish Institute for Financial Research Conference, the Conference in Memory of Jan Mossin at the Norwegian School of Business, the 2006 European Finance Association meetings, and the 2006 Centre for Analytical Finance conference at the Indian School of Business. We are also grateful for assistance in computing order imbalance measures from Laura Tuttle. We thank Nasdaq Economic Research for data, and the Dice Center for Financial Research at the Fisher College of Business for financial support. Finally, we thank the editor and the anonymous referee for extremely helpful comments and suggestions. All errors are our own.