Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations

Harrison, J. Michael; Kreps, David M.

doi:10.2307/1884166

Cited by 1,342 publications

(814 citation statements)

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“…2 For theoretical models on how short-sale constraints can lead to overvaluation, speculative trading, and bubbles, see, for example, Miller (1977), Harrison and Kreps (1978), Scheinkman and Xiong (2003), and Hong and Stein (2003). Diamond and Verrecchia (1987) show theoretically that a market with short-sale constraints incorporates information more slowly than a market in which short sales are not restricted.…”

Section: Introductionmentioning

confidence: 99%

Predatory Short Selling

Brunnermeier

Oehmke

2013

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Financial institutions may be vulnerable to predatory short selling. When the stock of a financial institution is shorted aggressively, leverage constraints imposed by short-term creditors can force the institution to liquidate long-term investments at fire sale prices. For financial institutions that are sufficiently close to their leverage constraints, predatory short selling equilibria co-exist with no-liquidation equilibria (the vulnerability region) or may even be the unique equilibrium outcome (the doomed region). Increased coordination among short sellers expands the doomed region, where liquidation is the unique equilibrium. Our model provides a potential justification for temporary restrictions on short selling of vulnerable institutions and can be used to assess recent empirical evidence on short-sale bans.

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Section: Introductionmentioning

confidence: 99%

Predatory Short Selling

Brunnermeier

Oehmke

2013

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“…2 See also Harrison and Kreps (1978), Hong and Stein (2002), Duffie, Garleanu, and Pedersen (2002), and Scheinkman and Xiong (2003).…”

Section: Introductionmentioning

confidence: 99%

“…They are reviled as odious pests, smudges on Wall Street, pecuniary vampires. "2 See also Harrison and Kreps (1978), Hong and Stein (2002), Duffie, Garleanu, and Pedersen (2002), and Scheinkman and Xiong (2003).1 Jones and Lamont (2002), Geczy, Musto, and Reed (2002), Ofek and Richardson (2003), Reed (2002), Ofek, Richardson, and Whitelaw (2003), Mitchell, Pulvino, and Stafford (2002)) to investigate if short-sale constraints contribute to short-term over-reaction in stock prices, and if short sellers are informed. The general conclusion reached by this literature is that short-sale costs are higher and short-sale constraints are more binding among stocks with low market capitalization and stocks with low institutional ownership.…”

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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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“…This is illustrated by the following example which is based on the model by Harrison and Kreps (1978). Let us assume that two types of traders are active on the market for an asset.…”

Section: Studies Gergely Lakos -Tibor Szendreimentioning

confidence: 99%