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Supply and Demand Shifts in the Shorting Market

  • Cohen, Lauren

    (U of Chicago)

  • Diether, Karl B.

    (Ohio State U)

  • Malloy, Christopher J.

    (London Business School)

Using proprietary data on stock loan fees and stock loan quantities from a large institutional investor, we clarify the nature of the correlation between shorting indicators and stock prices. Employing a unique identification strategy, we are able to isolate shifts in the supply and demand for shorting. We find that shorting demand is an important predictor of future stock returns. The magnitude of this effect is large: an increase in shorting demand leads to a significant negative average abnormal return of 2.52% in the following month. We also provide evidence of a causal link between shorting demand and future stock returns by showing that these results are unlikely to be driven by public information flow.

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File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2005/2005-8.pdf
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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2005-8.

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Date of creation: Feb 2005
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Handle: RePEc:ecl:ohidic:2005-8
Contact details of provider: Phone: (614) 292-8449
Web page: http://www.cob.ohio-state.edu/fin/dice/list.htm
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  1. 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.
  2. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  3. 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.
  4. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
  5. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
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  7. 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.
  8. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
  9. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  10. D'Avolio, Gene, 2002. "The market for borrowing stock," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 271-306.
  11. Christoffersen, Susan E. K. & Geczy, Christopher C. & Musto, David K. & Reed, Adam V., 2003. "The Limits to Dividend Arbitrage: Implications for Cross-Border Investment," Working Papers 03-2, University of Pennsylvania, Wharton School, Weiss Center.
  12. Duffie, Darrell, 1996. " Special Repo Rates," Journal of Finance, American Finance Association, vol. 51(2), pages 493-526, June.
  13. 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.
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