IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/21166.html
   My bibliography  Save this paper

Days to Cover and Stock Returns

Author

Listed:
  • Harrison Hong
  • Weikai Li
  • Sophie X. Ni
  • Jose A. Scheinkman
  • Philip Yan

Abstract

The short ratio - shares shorted to shares outstanding - is an oft-used measure of arbitrageurs’ opinion about a stock’s over-valuation. We show that days-to-cover (DTC), which divides a stock’s short ratio by its average daily share turnover, is a more theoretically well-motivated measure because trading costs vary across stocks. Since turnover falls with trading costs, DTC is approximately the marginal cost of the shorts. At the arbitrageurs’ optimum it equals the marginal benefit, which is their opinion about over-valuation. DTC is a better predictor of poor stock returns than short ratio. A long-short strategy using DTC generates a 1.2% monthly return.

Suggested Citation

  • Harrison Hong & Weikai Li & Sophie X. Ni & Jose A. Scheinkman & Philip Yan, 2015. "Days to Cover and Stock Returns," NBER Working Papers 21166, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:21166
    Note: AP
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w21166.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Karl B. Diether & Kuan-Hui Lee & Ingrid M. Werner, 2009. "Short-Sale Strategies and Return Predictability," The Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 575-607, February.
    2. Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
    3. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2002. "Breadth of ownership and stock returns," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 171-205.
    4. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    5. Daniel, Kent, et al, 1997. "Measuring Mutual Fund Performance with Characteristic-Based Benchmarks," Journal of Finance, American Finance Association, vol. 52(3), pages 1035-1058, July.
    6. Lauren Cohen & Karl B. Diether & Christopher J. Malloy, 2007. "Supply and Demand Shifts in the Shorting Market," Journal of Finance, American Finance Association, vol. 62(5), pages 2061-2096, October.
    7. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    8. Asquith, Paul & Pathak, Parag A. & Ritter, Jay R., 2005. "Short interest, institutional ownership, and stock returns," Journal of Financial Economics, Elsevier, vol. 78(2), pages 243-276, November.
    9. Amihud, Yakov & Mendelson, Haim & Pedersen, Lasse Heje, 2006. "Liquidity and Asset Prices," Foundations and Trends(R) in Finance, now publishers, vol. 1(4), pages 269-364, February.
    10. Ekkehart Boehmer & Charles M. Jones & Xiaoyan Zhang, 2008. "Which Shorts Are Informed?," Journal of Finance, American Finance Association, vol. 63(2), pages 491-527, April.
    11. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    12. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    13. Engelberg, Joseph E. & Reed, Adam V. & Ringgenberg, Matthew C., 2012. "How are shorts informed?," Journal of Financial Economics, Elsevier, vol. 105(2), pages 260-278.
    14. Brent, Averil & Morse, Dale & Stice, E. Kay, 1990. "Short Interest: Explanations and Tests," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(2), pages 273-289, June.
    15. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    16. Itamar Drechsler & Qingyi Freda Drechsler, 2014. "The Shorting Premium and Asset Pricing Anomalies," NBER Working Papers 20282, National Bureau of Economic Research, Inc.
    17. Duffie, Darrell & Garleanu, Nicolae & Pedersen, Lasse Heje, 2002. "Securities lending, shorting, and pricing," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 307-339.
    18. Dechow, Patricia M. & Hutton, Amy P. & Meulbroek, Lisa & Sloan, Richard G., 2001. "Short-sellers, fundamental analysis, and stock returns," Journal of Financial Economics, Elsevier, vol. 61(1), pages 77-106, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Comerton-Forde, Carole & Do, Binh Huu & Gray, Philip & Manton, Tom, 2016. "Assessing the information content of short-selling metrics using daily disclosures," Journal of Banking & Finance, Elsevier, vol. 64(C), pages 188-204.
    2. Liyun Zhou & Chunpeng Yang, 2020. "Investor sentiment, investor crowded-trade behavior, and limited arbitrage in the cross section of stock returns," Empirical Economics, Springer, vol. 59(1), pages 437-460, July.
    3. Ravi Kashyap, 2019. "Concepts, Components and Collections of Trading Strategies and Market Color," Papers 1910.02144, arXiv.org, revised Jan 2020.
    4. Jank, Stephan & Roling, Christoph & Smajlbegovic, Esad, 2021. "Flying under the radar: The effects of short-sale disclosure rules on investor behavior and stock prices," Journal of Financial Economics, Elsevier, vol. 139(1), pages 209-233.
    5. Liyun Zhou & Chunpeng Yang, 2019. "Differences in the effects of seller-initiated versus buyer-initiated crowded trades in stock markets," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 14(4), pages 859-890, December.
    6. Chen, Jing & Chen, Bintong & Li, Wei, 2018. "Who should be pricing leader in the presence of customer returns?," European Journal of Operational Research, Elsevier, vol. 265(2), pages 735-747.
    7. Blau, Benjamin M. & Cox, Justin S. & Griffith, Todd G. & Voges, Ryan, 2023. "Daily short selling around reverse stock splits," Journal of Financial Markets, Elsevier, vol. 65(C).
    8. Zhou, Liyun & Yang, Chunpeng, 2019. "Stochastic investor sentiment, crowdedness and deviation of asset prices from fundamentals," Economic Modelling, Elsevier, vol. 79(C), pages 130-140.
    9. Jia, Yuecheng & Simkins, Betty & Feng, Hongrui, 2023. "Political connections and short sellers," Journal of Banking & Finance, Elsevier, vol. 146(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Melissa Porras Prado & Pedro A. C. Saffi & Jason Sturgess, 2016. "Ownership Structure, Limits to Arbitrage, and Stock Returns: Evidence from Equity Lending Markets," The Review of Financial Studies, Society for Financial Studies, vol. 29(12), pages 3211-3244.
    2. repec:oup:revfin:v:29:y:2016:i:12:p:3211-3244. is not listed on IDEAS
    3. Jank, Stephan & Roling, Christoph & Smajlbegovic, Esad, 2021. "Flying under the radar: The effects of short-sale disclosure rules on investor behavior and stock prices," Journal of Financial Economics, Elsevier, vol. 139(1), pages 209-233.
    4. Wang, Xue & Yan, Xuemin (Sterling) & Zheng, Lingling, 2020. "Shorting flows, public disclosure, and market efficiency," Journal of Financial Economics, Elsevier, vol. 135(1), pages 191-212.
    5. Takahashi, Hidetomo, 2010. "Short-sale inflow and stock returns: Evidence from Japan," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2403-2412, October.
    6. 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.
    7. Hanauer, Matthias X. & Lesnevski, Pavel & Smajlbegovic, Esad, 2023. "Surprise in short interest," Journal of Financial Markets, Elsevier, vol. 65(C).
    8. Blau, Benjamin M. & Pinegar, J. Michael, 2013. "Are short sellers incrementally informed prior to earnings announcements?," Journal of Empirical Finance, Elsevier, vol. 21(C), pages 142-155.
    9. Gerlinde Fellner & Erik Theissen, 2006. "Short Sale Constraints, Divergence of Opinion and Asset Values: Evidence from the Laboratory," Labsi Experimental Economics Laboratory University of Siena 009, University of Siena.
    10. Lauren Cohen & Karl B. Diether & Christopher J. Malloy, 2007. "Supply and Demand Shifts in the Shorting Market," Journal of Finance, American Finance Association, vol. 62(5), pages 2061-2096, October.
    11. Antonio Gargano & Juan Sotes-Paladino & Patrick Verwijmeren, 2022. "Out of Sync: Dispersed Short Selling and the Correction of Mispricing," Working Papers 108, Red Nacional de Investigadores en Economía (RedNIE).
    12. Lee, Eunju & Piqueira, Natalia, 2017. "Short selling around the 52-week and historical highs," Journal of Financial Markets, Elsevier, vol. 33(C), pages 75-101.
    13. Itamar Drechsler & Qingyi Freda Drechsler, 2014. "The Shorting Premium and Asset Pricing Anomalies," NBER Working Papers 20282, National Bureau of Economic Research, Inc.
    14. Charles M. Jones & Adam V. Reed & William Waller, 2016. "Revealing Shorts An Examination of Large Short Position Disclosures," The Review of Financial Studies, Society for Financial Studies, vol. 29(12), pages 3278-3320.
    15. Comerton-Forde, Carole & Jones, Charles M. & Putniņš, Tālis J., 2016. "Shorting at close range: A tale of two types," Journal of Financial Economics, Elsevier, vol. 121(3), pages 546-568.
    16. Kelley Bergsma & Jitendra Tayal, 2019. "Short Interest and Lottery Stocks," Financial Management, Financial Management Association International, vol. 48(1), pages 187-227, March.
    17. Chung, Chune Young & DeVault, Luke & Wang, Kainan, 2019. "Perceived information, short interest, and institutional demand," Journal of Empirical Finance, Elsevier, vol. 54(C), pages 22-38.
    18. Greppmair, Stefan & Jank, Stephan & Smajlbegovic, Esad, 2023. "On the importance of fiscal space: Evidence from short sellers during the COVID-19 pandemic," Journal of Banking & Finance, Elsevier, vol. 147(C).
    19. Fellner, Gerlinde & Theissen, Erik, 2014. "Short sale constraints, divergence of opinion and asset prices: Evidence from the laboratory," Journal of Economic Behavior & Organization, Elsevier, vol. 101(C), pages 113-127.
    20. Blocher, Jesse & Haslag, Peter & Zhang, Chi, 2020. "Short trading and short investing," Journal of Empirical Finance, Elsevier, vol. 59(C), pages 154-171.
    21. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2002. "Breadth of ownership and stock returns," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 171-205.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:21166. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.