Profitability of Short-Selling and Exploitability of Short Information

Short selling and exchange-traded funds returns: evidence from the London Stock Exchange

“…Asquith and Meulbroek (1995), Desai et al (2002) and Asquith, Pathak, and Ritter (2005) find that high levels of short interest in stocks are bearish signals of a negative relationship between the level of short interest and stock returns. Senchack and Starks (1993) and Choie and Hwang (1994) identify a negative association between changes in short interest and stock returns, in accordance with Diamond and Verrecchia's hypothesis. Choie and Hwang's (1994) find that large increases in short interest provide a more informative signal than the level of short interest about short-selling returns.…”

“…Senchack and Starks (1993) and Choie and Hwang (1994) identify a negative association between changes in short interest and stock returns, in accordance with Diamond and Verrecchia's hypothesis. Choie and Hwang's (1994) find that large increases in short interest provide a more informative signal than the level of short interest about short-selling returns. Boehmer, Jones, and Zhang (2008) find that heavily shorted stocks on the New York Stock Exchange (NYSE) significantly underperform lightly shorted stocks over 20 trading days.…”

“…1 Our results offer insights into ETF shorting, which differ from the received wisdom concerning individual stock shorting. For individual stocks, the literature suggests the higher the level of short interest, the larger is the negative abnormal return (Figlewski 1981;Senchack and Starks 1993;Choie and Hwang 1994;Asquith and Meulbroek, 1995;Desai et al 2002;Asquith, Pathak, and Ritter 2005). For ETF, our results suggest that the larger the increase in short interest, the larger is Jensen's alpha.…”

“…We estimate Jensen's alpha for each portfolio over a 30-day window following any observed increase in short interest. Using the increase-inshort-interest ratio measure, the pattern is the reverse of that reported in most previous studies of the association between increases in short interest in individual stocks and their subsequent performance, which indicate under-performance following large increases in short interest (Senchack and Starks 1993;Choie and Hwang 1994;Mohamad et al 2013). On the contrary, we find that ETFs tend to over-perform following large increases in short interest.…”