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Holding on to Your Shorts: When Do Short Sellers Retreat?

Pavel G. Savor

Temple University - Fox School of Business

Mario Gamboa-Cavazos

Harvard University; AQR Capital Management, LLC

March 28, 2011

This paper studies the response of arbitrageurs to adverse price shocks. We focus on short sellers and find that they cover their positions after suffering losses and increase them after experiencing gains. While this relationship is very strong for positions established due to perceived overvaluation, it does not hold for arbitrage trades, where the investor is hedged against stock price movements. Finally, expected returns do not explain the documented behavior, with short sellers actually losing money by closing their positions in response to losses. We interpret these results as evidence that even sophisticated investors cannot or are not willing to maintain positions after adverse market movements, making arbitrage less effective in moving prices towards their fundamental value.

Number of Pages in PDF File: 46

Keywords: Short Selling, Limits to Arbitrage, Arbitrageurs

JEL Classification: G12, G14

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Date posted: April 15, 2005 ; Last revised: April 21, 2014

Suggested Citation

Savor, Pavel G. and Gamboa-Cavazos, Mario, Holding on to Your Shorts: When Do Short Sellers Retreat? (March 28, 2011). Available at SSRN: http://ssrn.com/abstract=689162 or http://dx.doi.org/10.2139/ssrn.689162

Contact Information

Pavel G. Savor (Contact Author)
Temple University - Fox School of Business ( email )
Fox School of Business and Management
Philadelphia, PA 19122
United States

Mario Gamboa-Cavazos
Harvard University ( email )
Littauer Center
Cambridge, MA 02138
United States
AQR Capital Management, LLC ( email )
Greenwich, CT
United States
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References:  35
Citations:  9

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