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Can Short-Sellers Predict Returns? Daily Evidence

Author

Listed:
  • Diether, Karl B.

    (Ohio State U)

  • Lee, Kuan-Hui

    (Rutgers U)

  • Werner, Ingrid M.

    (Ohio State U)

Abstract

We test whether short-sellers in U.S. stocks are able to predict future returns based on new SEC-mandated data for 2005. There is a tremendous amount of short-selling activity during the sample: short-sales represent 24 percent of NYSE and 31 percent of Nasdaq share volume. Short-sellers increase their trading following positive returns and they correctly predict future negative abnormal returns. These patterns are robust to controlling for voluntary liquidity provision and for opportunistic risk-bearing by short-sellers. The results are consistent with the hypothesis that short-sellers are trading on short-term overreaction in stock returns. A trading strategy based on daily short-selling activity generates significant positive returns during the sample period.

Suggested Citation

  • Diether, Karl B. & Lee, Kuan-Hui & Werner, Ingrid M., 2007. "Can Short-Sellers Predict Returns? Daily Evidence," Working Paper Series 2005-15, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2005-15
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    File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2005/2005-15.pdf
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    References listed on IDEAS

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    1. repec:ers:journl:v:v:y:2017:i:1:p:18-48 is not listed on IDEAS
    2. Hirshleifer, David & Teoh, Siew Hong & Yu, Jeff Jiewei, 2007. "Do short-sellers arbrtrage accrual-based return anomalies?," MPRA Paper 5510, University Library of Munich, Germany, revised 27 Oct 2007.
    3. Simon Grima & Stephen Sammut, 2017. "A Study on the Impact of the Short Selling Ban on FIBS," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 18-48.

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