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 22, 2014
We examine how short sellers form trading strategies when faced with progressively more crowded signals over time. While they increasingly use anomaly-based signals to short overpriced firms (short arbitrage), they even more intensively use these signals to avoid underpriced firms (short avoidance). Short sellers earn all their abnormal returns from short arbitrage the entire time period but avoid potential losses by pursuing non-anomaly strategies in recent years. The negative short interest-return relation can be fully explained by anomalies only in early years, suggesting short sellers have become more sophisticated in using less-crowded non-anomaly signals to improve performance in recent years.
Number of Pages in PDF File: 56
Keywords: financial market anomalies, short arbitrage, trading strategies
JEL Classification: G12, G14working papers series
Date posted: May 24, 2014
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