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Daily short interest, idiosyncratic risk, and stock returns

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  • Au, Andrea S.
  • Doukas, John A.
  • Onayev, Zhan

Abstract

This paper examines the relation between short selling and returns and the impact of arbitrage costs on short sellers' behavior. Using daily UK short selling data, we find that stocks with low short interest levels experience significant positive returns on both an equal- and value-weighted basis. Economic theory predicts that short sellers avoid establishing positions in stocks with high idiosyncratic risk. Our results indicate a negative relation between short interest and returns among high idiosyncratic risk stocks and that short selling activity is mostly concentrated in low idiosyncratic risk stocks where it is less costly to arbitrage fundamental risk.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Markets.

Volume (Year): 12 (2009)
Issue (Month): 2 (May)
Pages: 290-316

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Handle: RePEc:eee:finmar:v:12:y:2009:i:2:p:290-316

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Web page: http://www.elsevier.com/locate/finmar

Related research

Keywords: Short-sale Idiosyncratic risk;

References

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Citations

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Cited by:
  1. Gerlinde Fellner & Erik Theissen, 2006. "Short Sale Constraints, Divergence of Opinion and Asset Values: Evidence from the Laboratory," Labsi Experimental Economics Laboratory University of Siena 009, University of Siena.
  2. Hansson, Fredrik & Rüdow Fors, Erik, 2009. "Get Shorty? - Market Impact of the 2008-09 U.K. Short Selling Ban," Working Papers in Economics 365, University of Gothenburg, Department of Economics.
  3. Fernando D. Chague & Rodrigo De-Losso, Alan De Genaro, Bruno C. Giovannetti, 2013. "Short Selling and Inside Information," Working Papers, Department of Economics 2013_06, University of São Paulo (FEA-USP).

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