Short Sellers' Trading on Anomalies
Cornell University - Dyson School of Applied Economics and Management; Korea University - Department of Finance
Florida State University
September 30, 2014
This paper investigates the extent to which short sellers trade on anomalies and how these trades affect their profitability. Our evidence suggests that short sellers consider anomaly strategies, in particular those that have high Sharpe Ratios and low correlations with other anomaly strategies. Anomaly-based short selling contributes substantially to short sellers’ profitability. In particular, our analysis implies that a 1% increase in anomaly-based short interest precedes 0.626% lower returns in the next month. A corresponding 1% increase in short interest that is not anomaly-based is associated with (only) 0.083% lower returns. In total, we estimate that at least 11.7% of short sellers’ profitability can be traced to their trading on anomalies.
Number of Pages in PDF File: 43
Keywords: Short Sellers, Anomalies, Profitability
JEL Classification: G11, G12, G14, M41working papers series
Date posted: August 30, 2012 ; Last revised: October 1, 2014
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