An Investigation of the Informational Role of Short Interest in the Nasdaq Market

Desai, Hemang; Ramesh, K.; Thiagarajan, S. Ramu; Balachandran, Bala V.

doi:10.1111/0022-1082.00495

Cited by 601 publications

(349 citation statements)

References 23 publications

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“…Diamond and Verrecchia (1987) propose that unanticipated increases in short selling will be followed by a price decline. Consistent with the proposition of Diamond and Verrecchia, Senchack and Starks (1993) and Desai et al (2002) show that monthly short interest predicts negative returns for NYSE stocks and NASDAQ stocks, respectively.…”

Section: Introductionsupporting

confidence: 62%

“…Research showing that short sellers are informed about future stock returns is robust (Diamond and Verrecchia, 1987;Senchack and Starks, 1993;Aitken et al, 1998;Desai et al, 2002;Christophe, Ferri, and Angel, 2004;and Boehmer, Jones, and Zhang, 2008). Diether, Lee, and Werner (2009) argue that informed investors are able to short stocks that become overvalued or out of line with their fundamental value while documenting the short sellers are contrarian in contemporaneous and past returns.…”

Section: Introductionmentioning

confidence: 99%

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Short Selling during Extreme Market Movements

Blau

Ness

et al. 2010

JOT

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This study examines short selling of NYSE stocks contained in the S&P 500 on days with extreme increases (up days) and extreme decreases (down days) in the index. While Diether, Lee, and Werner (2009) show that short sellers are generally contrarian in contemporaneous returns, we find that short selling increases on large down days and decreases on large up days suggesting that during extreme market movements, short sellers tend to follow the crowd. Further, our results indicate that short sellers do not anticipate down days indicating that these event days are largely unforeseen. When examining the return predictability of short sellers on event days, we observe that short sellers on up days are significantly better at predicting negative next-day returns than short sellers on down days indicating that contrarian short selling is more profitable than momentum short selling.

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Section: Introductionsupporting

confidence: 62%

Section: Introductionmentioning

confidence: 99%

Short Selling during Extreme Market Movements

Blau

Ness

et al. 2010

JOT

View full text Add to dashboard Cite

show abstract

“…Most previous studies have used monthly stock-specific short interest data (e.g., Figlewski and Webb (1993), Figlewski (1981), Dechow, Hutton, Meulbroek, and Sloan (2001), Desai et al (2002), Asquith, Pathak, and Ritter (2005), and Singal and Xu (2005)). There are three important problems with using monthly short interest data.…”

Section: Introductionmentioning

confidence: 99%

Can Short-sellers Predict Returns? Daily Evidence

Diether¹,

Lee

Werner

2005

SSRN Journal

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We test whether short-sellers in Nasdaq-listed stocks are able to predict future returns based on new SEC-mandated data for the first six months of 2005. There is a tremendous amount of short-term trading strategies involving short-sales during the sample: Short-sales represent 27 percent of Nasdaq share volume while monthly short-interest is about 3.1 percent of shares outstanding (5.5 days to cover). Short-sellers are on average contrarian -they sell short following positive returns. Increasing short-sales predict future negative returns, and the predictive power comes primarily from small trades. A trading strategy based on daily short-selling activity generates significant returns, but incurs costs large enough to wipe out any profits. * All three authors are at the Fisher College of Business, The Ohio State University. We are grateful for comments from Leslie Boni, Rudi Fahlenbrach, Frank Hatheway, David Musto, René Stulz, and seminar participants at the Ohio State University, the NBER Market Microstructure Group, and the University of Georgia. We thank Nasdaq Economic Research for data. All errors are our own.Many market observers accuse short-sellers of destabilizing markets by selling stocks (they do not even own) when prices are already trending downward, exacerbating the negative momentum. Issuers and journalists often characterize short-sellers' activities as immoral, unethical and downright un-American. 1 Academics and traders instead argue that short-sellers stabilize security prices by selling stocks when prices exceed fundamental values, thus helping correct market overreaction. Short-term over-reaction could be caused by impediments to short-selling, as high costs of executing short-sales may result in stock prices reflecting the opinions of optimistic investors only (Miller (1977)). 2 Some researchers have even argued that costly short-selling was one of the culprits behind the stock market bubble of the late 1990s (e.g., Ofek and Richardson (2003)).In this study, we use the SEC mandated tick-by-tick short-sale data for 2,815 Nasdaq-listed stocks for the period January 3, 2005 to June 30, 2005 to test whether short-sellers are contrarian or momentum traders and whether they are able to predict future returns. We test these hypotheses by studying the link between short-selling activity and future returns and how short-sellers react to past returns on a daily level.The literature on short-selling is growing rapidly. Most previous studies have used monthly stock-specific short interest data (e.g., Figlewski and Webb (1993), Figlewski (1981), Dechow, Hutton, Meulbroek, and Sloan (2001), Desai et al (2002), Asquith, Pathak, and Ritter (2005), and Singal and Xu (2005)). There are three important problems with using monthly short interest data.First, the monthly reporting frequency does not permit researchers to study short-term trading strategies. Second, monthly short interest data does not distinguish between the short interest of dealers (who are exempt from short-sale restrictions) from th...

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“…We estimate the 13) To eliminate the reverse causality effect, we defined the DTS industry based on the ranks of previous quarter. 14) Figlewski (1981) and Desai et al (2002) showed that a high fraction of shares shorted precedes low future returns.…”

Section: Empirical Analysismentioning

confidence: 99%

Can Short-Selling Alleviate the Underpricing?

Wang¹,

Lee²

2017

Glob Bus Financ Rev

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A B S T R A C TThis paper investigates whether short-selling facilitates arbitrage activity and mitigates the positive post-earnings announcement drift (PEAD), the well-known underpricing anomaly. Using the quarterly earnings announcement of the Korean Stock Exchange KOSPI200 composite stocks, we find that the positive earnings stock in a difficult-to-short industry experiences the larger and more persistent underpricing after earnings announcement than those in an easy-to-short industry; and that the severe underpricing in a difficult-to-short industry is associated with the short-sale constraint, not with their illiquidity or information inefficiency. We also find that the inverse relationship between the positive PEAD and its industry's short-ability is stronger during the inactive ELW trade period, weaker during the active ELW trade period. Our findings suggest that short-selling help not only the overpriced stocks but also the underpriced stocks revert back to its fundamental value by facilitating arbitrage activities.

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An Investigation of the Informational Role of Short Interest in the Nasdaq Market

Cited by 601 publications

References 23 publications

Short Selling during Extreme Market Movements

Short Selling during Extreme Market Movements

Can Short-sellers Predict Returns? Daily Evidence

Can Short-Selling Alleviate the Underpricing?

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