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Mutual Funds and Short-Sellers: Why Does Short-Sale Volume Predict Stock Returns?

Author

Listed:
  • Arif, Salman

    (IN University)

  • Ben-Rephael, Azi

    (IN University)

  • Lee, Charles M. C.

Abstract

Daily directional trading by mutual funds (MFs) is highly-persistent and price-destabilizing, leading to return reversals lasting months. This effect is distinct from the "flow-induced trading" phenomenon in prior studies. At the same time, short-sale volume (SSV) reacts strongly in the opposite direction--when MFs buy (sell), SSV increases (decreases). Daily SSV is responsive to both the expected component of MF trades (based on prior-days' trading), and the unexpected component (based on same-day trading). We conclude some short-sellers provide liquidity strategically in response to price-destabilizing MF trades, and this activity largely accounts for SSV's ability to predict long-horizon returns.

Suggested Citation

  • Arif, Salman & Ben-Rephael, Azi & Lee, Charles M. C., 2017. "Mutual Funds and Short-Sellers: Why Does Short-Sale Volume Predict Stock Returns?," Research Papers 3162, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3162
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    File URL: https://www.gsb.stanford.edu/gsb-cmis/gsb-cmis-download-auth/376071
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    Cited by:

    1. Jiao, Yawen & Massa, Massimo & Zhang, Hong, 2016. "Short selling meets hedge fund 13F: An anatomy of informed demand," Journal of Financial Economics, Elsevier, vol. 122(3), pages 544-567.
    2. Massa, Massimo & Jiao, Yawen, 2015. "Short Selling Meets Hedge Fund 13F: An Anatomy of Informed Demand," CEPR Discussion Papers 10471, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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