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File name: SSRN-id1857015. ; Size: 166K
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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.
Number of Pages in PDF File: 52
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Date posted: March 2, 2007
; Last revised: June 4, 2011
Suggested CitationHong, Harrison G., 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
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