Hostname: page-component-78c5997874-4rdpn Total loading time: 0 Render date: 2024-11-15T10:25:50.414Z Has data issue: false hasContentIssue false
  • English
  • Français

Short Covering Trades

Published online by Cambridge University Press:  28 March 2018

Ekkehart Boehmer ,
Truong X. Duong  and
Zsuzsa R. Huszár
Get access Rights & Permissions [Opens in a new window]

Abstract

Short sellers are known to have private information about security prices. Empirical evidence of short selling, however, is based on only half of short sellers’ trading activity; specifically, the opening of the position. Using disclosed large-short-position data from the Japanese stock market, we provide the first detailed evidence of covering trades and find a positive reaction to short covering that only partially reverses. Although these results are consistent with substantial transaction costs for closing large short positions, they also reveal that some short sellers are privately informed about positive future events and have timing ability in covering positions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 2 , April 2018 , pp. 723 - 748
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

Huszár is also affiliated with the Risk Management Institute (RMI) at NUS and the Institute of Real Estate Studies (IRES) at NUS. We thank Yakov Amihud, Tarun Chordia, Jennifer Conrad (the editor), Allaudeen Hameed, Pedro Saffi, Takeshi Yamada, Weina Zhang, and especially an anonymous referee for their helpful comments. Huszár acknowledges the generous financial support from a NUS startup grant (R-315-000-087-133) and an academic research grant (R-315-000-085-112). The authors also thank IHS Markit Securities (formerly Data Explorer) for providing the data and relevant information.

References

Asquith, P.; Pathak, P. A.; and Ritter, J. R.. “Short Interest, Institutional Ownership, and Stock Returns.” Journal of Financial Economics, 78 (2005), 243–276.Google Scholar
Autore, D. M.; Boulton, T. J.; and Braga-Alves, M. V.. “Failures to Deliver, Short Sale Constraints, and Stock Overvaluation.” Financial Review, 50 (2015), 143–172.CrossRefGoogle Scholar
von Beschwitz, B., and Massa, M.. “Biased Shorts: Short Sellers’ Disposition Effect and Limits to Arbitrage.” INSEAD Working Paper (2017).Google Scholar
Boehmer, E.; Huszár, Z. R.; and Jordan, B. D.. “The Good News in Short Interest.” Journal of Financial Economics, 96 (2010), 80–97.CrossRefGoogle Scholar
Boehmer, E.; Jones, C. M.; and Zhang, X.. “Which Shorts Are Informed?” Journal of Finance, 63 (2008), 491–527.Google Scholar
Boehmer, E., and Wu, J.. “Short Selling and the Price Discovery Process.” Review of Financial Studies, 26 (2013), 287–322.Google Scholar
Brent, A.; Morse, D.; and Stice, E. K.. “Short Interest: Explanations and Tests.” Journal of Financial and Quantitative Analysis, 25 (1990), 273–289.Google Scholar
Bris, A.; Goetzmann, W.; and Zhu, N.. “Efficiency and the Bear: Short Sales and Markets around the World.” Journal of Finance, 62 (2007), 1029–1079.CrossRefGoogle Scholar
Choi, D.; Getmansky, M.; and Tookes, H.. “Convertible Bond Arbitrage, Liquidity Externalities, and Stock Prices.” Journal of Financial Economics, 91 (2009), 227–251.Google Scholar
Desai, H.; Ramesh, K.; Thiagarajan, S. R.; and Balachandran, B. V.. “Investigation of the Information Role of Short Interest in the NASDAQ Market.” Journal of Finance, 57 (2002), 2263–2287.Google Scholar
Diether, K. B.; Lee, K.-H.; and Werner, I. M.. “It’s SHO Time! Short Sale Price Tests and Market Quality.” Journal of Finance, 64 (2009), 37–73.CrossRefGoogle Scholar
Easley, D., and O’Hara, M.. “Price, Trade Size, and Information in Securities Markets.” Journal of Financial Economics, 18 (1987), 69–90.Google Scholar
Engelberg, J. E.; Reed, A. V.; and Ringgenberg, M. C.. “How Are Shorts Informed? Short Sellers, News, and Information Processing.” Journal of Financial Economics, 105 (2012), 260–278.Google Scholar
Fama, E. F., and MacBeth, J. D.. “Risk Return and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.Google Scholar
Hasbrouck, J.“Measuring the Information Content of Stock Trades.” Journal of Finance, 46 (1991), 179–207.Google Scholar
Jank, S.; Roling, C.; and Smajlbegovic, E.. “Flying under the Radar: The Effects of Short Sale Disclosure Rules on Investor Behavior and Stock Prices.” Bundesbank Discussion Paper No. 25/2016. Available at https://ssrn.com/abstract=2809498 (2016).Google Scholar
Jank, S., and Smajlbegovic, E.. “Dissecting Short Sale Performance: Evidence from Large Position Disclosures.” Working Paper, available at http://ssrn.com/abstract=2631266 (2017).Google Scholar
Jarrow, R. A.“Market Manipulations, Bubbles, Corners, and Short Squeezes.” Journal of Financial and Quantitative Analysis, 27 (1992), 311–336.Google Scholar
Jones, C. M., and Lamont, O. A.. “Short-Sale Constraints and Stock Returns.” Journal of Financial Economics, 66 (2002), 207–239.CrossRefGoogle Scholar
Jones, C. M.; Reed, A. V.; and Waller, W.. “Revealing Shorts: An Examination of Large Short Position Disclosures.” Review of Financial Studies, 29 (2016), 3278–3322.Google Scholar
Kecskés, A.; Mansi, S.; and Zhang, A.. “Are Short Sellers Informed? Evidence from the Bond Market.” Accounting Review, 88 (2013), 611–639.Google Scholar
Lamont, O. A., and Stein, J. C.. “Aggregate Short Interest and Market Valuations.” American Economic Review, 94 (2004), 29–32.Google Scholar
Massa, M.; Zhang, B.; and Zhang, H.. “The Invisible Hand of Short Selling: Does Short Selling Discipline Earnings Management?” Review of Financial Studies, 28 (2015), 1701–1736.Google Scholar
Newey, W., and West, K.. “A Simple, Positive Semi-Definite, Heteroscedastic and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.Google Scholar
Saffi, P. A. C., and Sigurdsson, K.. “Price Efficiency and Short Selling.” Review of Financial Studies, 24 (2011), 821–853.CrossRefGoogle Scholar
Savor, P., and Gamboa-Cavazos, M.. “Holding on to Your Shorts: When Do Short Sellers Retreat?” Working Paper, Temple University. Available at https://ssrn.com/abstract=689162 (2014).Google Scholar
Stambaugh, R. F.; Yu, J.; and Yuan, Y.. “The Short of It: Investor Sentiment and Anomalies.” Journal of Financial Economics, 104 (2012), 288–302.CrossRefGoogle Scholar