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Short of Capital: Stock Market Implications of Short Sellers’ Losses

Author

Listed:
  • Antonio Gargano

    (University of Houston)

  • Juan Sotes-Paladino

    (Universidad de los Andes)

  • Patrick Verwijmeren

    (Erasmus School of Economics/University of Melbourne)

Abstract

We provide evidence that losses constrain short sellers but not the transmission of information to prices. Using unique data on U.S. equity lending, we document a negative impact of the mark-tomarket losses of a stock’s short sellers, but no impact of their gains, on the future shorting of the stock. Consistent with funding and institutional constraints limiting short selling, we further show that the effect is highly asymmetric across different loss levels and stronger among stocks facing higher margin requirements. However, loss-making short selling has no predictive power for returns, suggesting a low impact of these constraints on the transmission of short sellers information to prices.

Suggested Citation

  • Antonio Gargano & Juan Sotes-Paladino & Patrick Verwijmeren, 2022. "Short of Capital: Stock Market Implications of Short Sellers’ Losses," Working Papers 116, Red Nacional de Investigadores en Economía (RedNIE).
    • Handle: RePEc:aoz:wpaper:116
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    File URL: https://rednie.eco.unc.edu.ar/files/DT/116.pdf
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    References listed on IDEAS

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    Cited by:

    1. Hanauer, Matthias X. & Lesnevski, Pavel & Smajlbegovic, Esad, 2023. "Surprise in short interest," Journal of Financial Markets, Elsevier, vol. 65(C).
    2. Arseny Gorbenko & Marcin Kacperczyk, 2023. "Short Interest and Aggregate Stock Returns: International Evidence," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 13(4), pages 691-733.

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    More about this item

    Keywords

    Short Selling; Margin Constraints; Limits to Arbitrage; Informed Trading;
    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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