Have Short Sellers Become More Sophisticated? Evidence from Market Anomalies
Juan (Julie) Wu
University of Georgia
Andrew (Jianzhong) Zhang
University of Nevada, Las Vegas - Department of Finance
May 1, 2013
We examine how equity short sellers form trading strategies when faced with an increasing “crowded-trade” effect (Stein 2009) over time in the context of a broad range of well-known asset pricing anomalies. We find that short selling has increased over time, with more increase on the short side of each anomaly. Overpricing on the short side of these anomalies has disappeared in recent years in firms with less-binding constraint. Short sellers’ trading on crowded signals based on these known anomalies largely explains the negative relation between short interest and returns in the early sample period of 1988-1999, but only explains part of this relation in more recent period of 2000-2011, suggesting that over time short sellers have become more sophisticated in trading on less-crowded signals independent of these known anomalies. Investors who trade on both anomaly and short interest signals are better off than only trading on the anomaly signal.
Keywords: Short selling, financial market anomaly, short arbitrage
JEL Classification: G12, G14working papers series
Date posted: March 15, 2012 ; Last revised: October 28, 2013
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