How Do Short Sellers Interact with Other Professional Investors? Evidence from the Daily Trades of Active Fund Managers

70 Pages Posted: 17 Sep 2014 Last revised: 30 Sep 2020

See all articles by Salman Arif

Salman Arif

University of Minnesota - Twin Cities - Carlson School of Management

Azi Ben-Rephael

Rutgers Business School - Rutgers University

Charles M.C. Lee

Foster School of Business, University of Washington; Stanford University - Graduate School of Business

Date Written: September 30, 2020

Abstract

The ability of short-sale volume (SSV) to predict returns is closely related to price pressure from mutual funds (MFs). Daily directional trading by MFs is highly-persistent and price-destabilizing, leading to return reversals lasting months. At the same time, SSV reacts strongly in the opposite direction – when MFs buy (sell), SSV increases (decreases). Daily SSV is responsive to both the expected component of MF trades (based on prior days’ trading), and the unexpected component (based on same-day trading). Furthermore, SSV-strategies only predict returns when MFs are trading in the opposite direction. We conclude some short-sellers are strategic liquidity providers who detect and respond to price-destabilizing MF trades.

Keywords: Price discovery, mutual funds, short-sellers, price pressure, liquidity provision, market efficiency

JEL Classification: D40, G10, G12, G14, G20, G23

Suggested Citation

Arif, Salman and Ben-Rephael, Azi and Lee, Charles M.C., How Do Short Sellers Interact with Other Professional Investors? Evidence from the Daily Trades of Active Fund Managers (September 30, 2020). Rock Center for Corporate Governance at Stanford University Working Paper No. 195, Finance Down Under 2016 Building on the Best from the Cellars of Finance, Stanford University Graduate School of Business Research Paper No. 14-35, Available at SSRN: https://ssrn.com/abstract=2496990 or http://dx.doi.org/10.2139/ssrn.2496990

Salman Arif

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://https://carlsonschool.umn.edu/faculty/salman-arif

Azi Ben-Rephael

Rutgers Business School - Rutgers University ( email )

HOME PAGE: http://https://sites.google.com/site/abenreph

Charles M.C. Lee (Contact Author)

Foster School of Business, University of Washington ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States

Stanford University - Graduate School of Business

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States

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