Daily Short Interest, Idiosyncratic Risk, and Stock Returns

46 Pages Posted: 3 Feb 2008

See all articles by John A. Doukas

John A. Doukas

Old Dominion University - Strome College of Business

Andrea S. Au

State Street Corporation

Zhan M. Onayev

Passport Capital Management

Multiple version iconThere are 2 versions of this paper

Date Written: December 12, 2007

Abstract

This paper examines the relation between short selling and returns and the impact of arbitrage costs on short sellers' behavior. Using daily UK short selling data, we find that stocks with low short interest levels experience significant positive returns on both an equal- and value-weighted basis. Economic theory predicts that short sellers avoid establishing positions in stocks with high idiosyncratic risk. Our results indicate a negative relation between short interest and returns among high idiosyncratic risk stocks and that short selling activity is mostly concentrated in low idiosyncratic risk stocks where it is less costly to arbitrage fundamental risk.

Keywords: Short-sale, Idiosyncratic Risk

JEL Classification: G12, G14, G15

Suggested Citation

Doukas, John A. and Au, Andrea S. and Onayev, Zhan M., Daily Short Interest, Idiosyncratic Risk, and Stock Returns (December 12, 2007). Available at SSRN: https://ssrn.com/abstract=1070932 or http://dx.doi.org/10.2139/ssrn.1070932

John A. Doukas (Contact Author)

Old Dominion University - Strome College of Business ( email )

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Andrea S. Au

State Street Corporation ( email )

State Street Financial Center
1 Lincoln Street
Boston, MA 02111
United States

Zhan M. Onayev

Passport Capital Management ( email )

30 Hotaling Place
San Francisco, CA
United States
415-525-8916 (Phone)

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