Abstract

http://ssrn.com/abstract=967751
 
 

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Do Arbitrageurs Amplify Economic Shocks?


Harrison G. Hong


Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Jeffrey D. Kubik


Syracuse University - Department of Economics

Tal Fishman


Princeton University - Bendheim Center for Finance; Princeton University - Department of Economics

June 1, 2011


Abstract:     
We test the hypothesis that arbitrageurs amplify economic shocks in equity markets. The ability of speculators to hold short positions depends on asset values: shorts are often reduced following good news about a stock. Therefore, the prices of highly shorted stocks are excessively sensitive to shocks compared to stocks with little short interest. We confirm this hypothesis using several empirical strategies including two quasi-experiments. In particular, we establish that the price of highly shorted stocks overshoots after good earnings news due to short covering compared to other stocks.

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Date posted: March 2, 2007 ; Last revised: June 4, 2011

Suggested Citation

Hong, Harrison G. and Kubik, Jeffrey D. and Fishman, Tal, Do Arbitrageurs Amplify Economic Shocks? (June 1, 2011). Available at SSRN: http://ssrn.com/abstract=967751 or http://dx.doi.org/10.2139/ssrn.967751

Contact Information

Harrison G. Hong (Contact Author)
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jeffrey D. Kubik
Syracuse University - Department of Economics ( email )
426 Eggers Hall
Syracuse, NY 13244-1020
United States
315-443-9063 (Phone)
315-443-1081 (Fax)
Tal Fishman
Princeton University - Bendheim Center for Finance ( email )
26 Prospect Avenue
Princeton, NJ 08540
United States
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States
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