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Short selling and market mispricing

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  • Eunju Lee

    (University of Massachusetts Lowell)

Abstract

We provide evidence on short sellers’ exploitation of temporary mispricing in the equity market. Using a mispricing indicator that measures deviations from a stock’s fundamental value, we find higher levels of short selling for temporarily overvalued stocks. The result is robust to controlling for short sale constraints and illiquidity, and it is more pronounced when short sale constraints do not bind and stocks are illiquid. We also find that informed short sellers are able to distinguish temporary overpricing from upward return momentum. However, when fundamental news is released, short sellers focus on exploiting negative fundamental changes rather than temporary overpricing. Short sellers contribute to market quality by correcting overpricing quickly over time, but they do not destabilize the market.

Suggested Citation

  • Eunju Lee, 2016. "Short selling and market mispricing," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 797-833, October.
    • Handle: RePEc:kap:rqfnac:v:47:y:2016:i:3:d:10.1007_s11156-015-0521-5
    DOI: 10.1007/s11156-015-0521-5
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    2. Xiaoming Zhang & Chunyan Wei & Stefano Zedda, 2019. "Analysis of China Commercial Banks’ Systemic Risk Sustainability through the Leave-One-Out Approach," Sustainability, MDPI, vol. 12(1), pages 1-15, December.
    3. Jorida Papakroni, 2018. "The dispersion anomaly and analyst recommendations," Review of Quantitative Finance and Accounting, Springer, vol. 50(3), pages 861-896, April.

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    More about this item

    Keywords

    Short selling; Mispricing; Fundamental value; Market quality;
    All these keywords.

    JEL classification:

    • 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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