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The Trend in Short Selling and the Cross Section of Stock Returns

Author

Listed:
  • Zhaobo Zhu

    (Shenzhen Audencia Business School, Shenzhen University)

  • Xinrui Duan

    (Shenzhen Audencia Business School, Shenzhen University)

  • Jun Tu

    (Lee Kong Chian School of Business, Singapore Management University)

Abstract

This paper documents that stocks with a decreasing (increasing) trend in their short selling as proxied by the long-term change in short interest experience significant and positive (negative) abnormal returns. Moreover, the positive abnormal returns have larger absolute values and are more persistent. The return predictability of the trend in short selling is not subsumed by the level of short interest and other well-known determinants of stock returns. Investor sentiment does not affect the profitability of the trend strategy. Our results suggest that market participants underreact to public information on short interest and that short sellers are sophisticated investors.

Suggested Citation

  • Zhaobo Zhu & Xinrui Duan & Jun Tu, 2019. "The Trend in Short Selling and the Cross Section of Stock Returns," Annals of Economics and Finance, Society for AEF, vol. 20(2), pages 565-586, November.
    • Handle: RePEc:cuf:journl:y:2019:v:20:i:2:zhuduantu
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Short selling; Short interest; Underreaction; Short-Sale constraints;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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