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Short Sales Constraints and Momentum in Stock Returns

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  • Ashiq Ali
  • Mark A. Trombley
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    Abstract

    We show that stock characteristics identified by D'Avolio (2002) provide a reliable index of the mostly unobservable short sales constraints. Specifically, we find that this index is positively related to the level of short interest and to short selling costs implied by the disparity in prices in the options and stock markets, and is negatively related to future returns. Using this index, we show that the magnitude of momentum returns for the period 1984 to 2001 is positively related to short sales constraints, and loser stocks rather than winner stocks drive this result. We conclude that short sales constraints are important in preventing arbitrage of momentum in stock returns. Copyright Blackwell Publishers Ltd, 2006.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-5957.2006.00616.x
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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

    Volume (Year): 33 (2006-04)
    Issue (Month): 3-4 ()
    Pages: 587-615

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    Handle: RePEc:bla:jbfnac:v:33:y:2006-04:i:3-4:p:587-615

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X

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    Cited by:
    1. Eli Beracha & Hilla Skiba, 2011. "Momentum in Residential Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 43(3), pages 299-320, October.
    2. Hirshleifer, David & Teoh, Siew Hong & Yu, Jeff Jiewei, 2009. "Short Arbitrage, Return Asymmetry And The Accrual Anomaly," MPRA Paper 16487, University Library of Munich, Germany.
    3. Xiafei Li & Chris Brooks & Jöelle Miffre, 2007. "Low-Cost Momentum Strategies," ICMA Centre Discussion Papers in Finance icma-dp2007-12, Henley Business School, Reading University.
    4. Badreddine, Sina & Galariotis, Emilios C. & Holmes, Phil, 2012. "The relevance of information and trading costs in explaining momentum profits: Evidence from optioned and non-optioned stocks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 589-608.
    5. Hirshleifer, David & Teoh, Siew Hong & Yu, Jeff Jiewei, 2007. "Do short-sellers arbrtrage accrual-based return anomalies?," MPRA Paper 5510, University Library of Munich, Germany, revised 27 Oct 2007.

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