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Short Selling ETFs
[The effect of price tests on trader behavior and market quality: An analysis of Reg SHO]

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  • Frank Weikai Li
  • Qifei Zhu

Abstract

We provide novel evidence that arbitrageurs use exchange-traded funds (ETFs) as an avenue to circumvent short-sale constraints at the stock level. Using a large sample of U.S. equity ETF holdings, we document that shorting activity on ETFs rises with the difficulty of shorting underlying stocks. Stocks heavily shorted via their holding ETFs underperform those that are lightly shorted. The return predictability of ETF shorting is distinct from stock-level shorting measures and is concentrated among stocks that face severe arbitrage constraints. These findings suggest that ETFs allow arbitrageurs to target overpriced stocks that are otherwise difficult to short. (JEL G12, G14)Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Frank Weikai Li & Qifei Zhu, 2022. "Short Selling ETFs [The effect of price tests on trader behavior and market quality: An analysis of Reg SHO]," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 12(4), pages 960-998.
    • Handle: RePEc:oup:rasset:v:12:y:2022:i:4:p:960-998.
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    File URL: http://hdl.handle.net/10.1093/rapstu/raac005
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    More about this item

    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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