Advanced Search
MyIDEAS: Login to save this article or follow this journal

Aggregate short selling, commonality, and stock market returns

Contents:

Author Info

  • Lynch, Andrew
  • Nikolic, Biljana
  • Yan, Xuemin (Sterling)
  • Yu, Han
Registered author(s):

    Abstract

    Using a comprehensive data set of short-sale transactions, we find strong evidence of commonality in daily shorting flows of individual stocks. More importantly, we find that aggregate shorting forecasts market returns. A one standard deviation increase in daily aggregate shorting is associated with a decrease in market excess return by up to 36bps over the following 10 trading days (9% annualized). In addition, we find modest evidence that short sellers are informed about future aggregate earnings news, macroeconomic news, and investor sentiment. Overall, our results are consistent with short sellers possessing superior short-term market-wide information.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.sciencedirect.com/science/article/pii/S1386418113000141
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

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

    Volume (Year): 17 (2014)
    Issue (Month): C ()
    Pages: 199-229

    as in new window
    Handle: RePEc:eee:finmar:v:17:y:2014:i:c:p:199-229

    Contact details of provider:
    Web page: http://www.elsevier.com/locate/finmar

    Related research

    Keywords: Aggregate Short Selling; Market return; Commonality;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Bruce N. Lehmann, 1988. "Fads, Martingales, and Market Efficiency," NBER Working Papers 2533, National Bureau of Economic Research, Inc.
    2. Charles M. Jones & Owen A. Lamont, 2001. "Short Sale Constraints and Stock Returns," NBER Working Papers 8494, National Bureau of Economic Research, Inc.
    3. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, 08.
    4. Lehmann, Bruce N, 1990. "Fads, Martingales, and Market Efficiency," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 1-28, February.
    5. Gregory W. Brown & Michael T. Cliff, 2005. "Investor Sentiment and Asset Valuation," The Journal of Business, University of Chicago Press, vol. 78(2), pages 405-440, March.
    6. Hemang Desai & K. Ramesh & S. Ramu Thiagarajan & Bala V. Balachandran, 2002. "An Investigation of the Informational Role of Short Interest in the Nasdaq Market," Journal of Finance, American Finance Association, vol. 57(5), pages 2263-2287, October.
    7. Nicholas Barberis & Richard Thaler, 2002. "A Survey of Behavioral Finance," NBER Working Papers 9222, National Bureau of Economic Research, Inc.
    8. John Y. Campbell & Sanford J. Grossman & Jiang Wang, 1992. "Trading Volume and Serial Correlation in Stock Returns," NBER Working Papers 4193, National Bureau of Economic Research, Inc.
    9. Wayne E. Ferson & Campbell R. Harvey, 1999. "Conditioning Variables and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 54(4), pages 1325-1360, 08.
    10. Joseph J. Seneca, 1967. "Short Interest: Bearish Or Bullish?," Journal of Finance, American Finance Association, vol. 22(1), pages 67-70, 03.
    11. Laura Veldkamp & Justin Wolfers, 2006. "Aggregate Shocks or Aggregate Information? Costly Information and Business Cycle Comovement," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 06-12, New York University, Leonard N. Stern School of Business, Department of Economics.
    12. Jones, Charles M & Kaul, Gautam & Lipson, Marc L, 1994. "Transactions, Volume, and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 631-51.
    13. Dechow, Patricia M. & Hutton, Amy P. & Meulbroek, Lisa & Sloan, Richard G., 2001. "Short-sellers, fundamental analysis, and stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 61(1), pages 77-106, July.
    14. Rui Albuquerque & Eva De Francisco & Luis B. Marques, 2008. "Marketwide Private Information in Stocks: Forecasting Currency Returns," Journal of Finance, American Finance Association, vol. 63(5), pages 2297-2343, October.
    15. Ofek, Eli & Richardson, Matthew & Whitelaw, Robert F., 2004. "Limited arbitrage and short sales restrictions: evidence from the options markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 74(2), pages 305-342, November.
    16. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
    17. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 129-152, Spring.
    18. Ekkehart Boehmer & Charles M. Jones & Xiaoyan Zhang, 2008. "Which Shorts Are Informed?," Journal of Finance, American Finance Association, vol. 63(2), pages 491-527, 04.
    19. Cohen, Lauren & Diether, Karl B. & Malloy, Christopher J., 2005. "Supply and Demand Shifts in the Shorting Market," Working Paper Series 2005-8, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    20. Owen A. Lamont & Jeremy C. Stein, 2004. "Aggregate Short Interest and Market Valuations," American Economic Review, American Economic Association, vol. 94(2), pages 29-32, May.
    21. Asquith, Paul & Pathak, Parag A. & Ritter, Jay R., 2005. "Short interest, institutional ownership, and stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 78(2), pages 243-276, November.
    22. Mark Hanna, 1968. "Short Interest: Bullish Or Bearish?—Comment," Journal of Finance, American Finance Association, vol. 23(3), pages 520-523, 06.
    23. Andrei Shleifer ad Robert W. Vishny, 1995. "The Limits of Arbitrage," Harvard Institute of Economic Research Working Papers 1725, Harvard - Institute of Economic Research.
    24. Malcolm Baker & Jeffrey Wurgler, 2000. "The Equity Share in New Issues and Aggregate Stock Returns," Journal of Finance, American Finance Association, vol. 55(5), pages 2219-2257, October.
    25. Jegadeesh, Narasimhan, 1990. " Evidence of Predictable Behavior of Security Returns," Journal of Finance, American Finance Association, vol. 45(3), pages 881-98, July.
    26. Andrew W. Lo & A. Craig MacKinlay, 1987. "Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test," NBER Working Papers 2168, National Bureau of Economic Research, Inc.
    27. Christophe, Stephen E. & Ferri, Michael G. & Hsieh, Jim, 2010. "Informed trading before analyst downgrades: Evidence from short sellers," Journal of Financial Economics, Elsevier, Elsevier, vol. 95(1), pages 85-106, January.
    28. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2002. "Order imbalance, liquidity, and market returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 65(1), pages 111-130, July.
    29. Michael J. Aitken & Alex Frino & Michael S. McCorry & Peter L. Swan, 1998. "Short Sales Are Almost Instantaneously Bad News: Evidence from the Australian Stock Exchange," Journal of Finance, American Finance Association, vol. 53(6), pages 2205-2223, December.
    30. Kamara, Avraham & Lou, Xiaoxia & Sadka, Ronnie, 2008. "The divergence of liquidity commonality in the cross-section of stocks," Journal of Financial Economics, Elsevier, Elsevier, vol. 89(3), pages 444-466, September.
    31. Stephen E. Christophe & Michael G. Ferri & James J. Angel, 2004. "Short-Selling Prior to Earnings Announcements," Journal of Finance, American Finance Association, vol. 59(4), pages 1845-1876, 08.
    32. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
    33. Boehmer, Ekkehart & Huszar, Zsuzsa R. & Jordan, Bradford D., 2010. "The good news in short interest," Journal of Financial Economics, Elsevier, Elsevier, vol. 96(1), pages 80-97, April.
    34. Hasbrouck, Joel & Seppi, Duane J., 2001. "Common factors in prices, order flows, and liquidity," Journal of Financial Economics, Elsevier, Elsevier, vol. 59(3), pages 383-411, March.
    35. Seyhun, H Nejat, 1988. "The Information Content of Aggregate Insider Trading," The Journal of Business, University of Chicago Press, vol. 61(1), pages 1-24, January.
    36. Jonathan M. Karpoff & Xiaoxia Lou, 2010. "Short Sellers and Financial Misconduct," Journal of Finance, American Finance Association, vol. 65(5), pages 1879-1913, October.
    37. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2000. "Commonality in liquidity," Journal of Financial Economics, Elsevier, Elsevier, vol. 56(1), pages 3-28, April.
    38. Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 0. "What Does Equity Sector Orderflow Tell Us About the Economy?," Review of Financial Studies, Society for Financial Studies, vol. 24(11), pages 3688-3730.
    39. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, Elsevier, vol. 18(2), pages 277-311, June.
    40. Seyhun, H Nejat, 1992. "Why Does Aggregate Insider Trading Predict Future Stock Returns?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(4), pages 1303-31, November.
    41. Lakonishok, Josef & Lee, Inmoo, 2001. "Are Insider Trades Informative?," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 79-111.
    42. Karl B. Diether & Kuan-Hui Lee & Ingrid M. Werner, 2009. "Short-Sale Strategies and Return Predictability," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 575-607, February.
    43. John S. Howe & Emre Unlu & Xuemin (Sterling) Yan, 2009. "The Predictive Content of Aggregate Analyst Recommendations," Journal of Accounting Research, Wiley Blackwell, vol. 47(3), pages 799-821, 06.
    44. Geczy, Christopher C. & Musto, David K. & Reed, Adam V., 2002. "Stocks are special too: an analysis of the equity lending market," Journal of Financial Economics, Elsevier, Elsevier, vol. 66(2-3), pages 241-269.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eee:finmar:v:17:y:2014:i:c:p:199-229. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.