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Do arbitrageurs amplify economic shocks?

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Author Info

  • Hong, Harrison
  • Kubik, Jeffrey D.
  • Fishman, Tal

Abstract

We test the hypothesis that arbitrageurs amplify economic shocks in equity markets. The ability of speculators to hold short positions depends on asset values. Shorts are often reduced following good news about a stock. Therefore, the prices of highly shorted stocks are excessively sensitive to shocks compared with stocks with little short interest. We confirm this hypothesis using several empirical strategies including two quasi-experiments. In particular, we establish that the price of highly shorted stocks overshoots after good earnings news due to short covering compared with other stocks.

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Bibliographic Info

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

Volume (Year): 103 (2012)
Issue (Month): 3 ()
Pages: 454-470

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Handle: RePEc:eee:jfinec:v:103:y:2012:i:3:p:454-470

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Shorting; Short covering; Leverage; Destabilizing arbitrage;

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References

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Cited by:
  1. Engelberg, Joseph E. & Reed, Adam V. & Ringgenberg, Matthew C., 2012. "How are shorts informed?," Journal of Financial Economics, Elsevier, vol. 105(2), pages 260-278.

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