The Optimal Trade Size Choice of Informed Short Sellers
31 Pages Posted: 15 May 2008 Last revised: 5 Aug 2009
Date Written: May 8, 2008
Abstract
Research (Diamond and Verrecchia, 1987, and Boehmer, Jones, and Zhang, 2008) finds that short sellers are informed about the true value of stocks as current short selling predicts future returns. We test which short-sale sizes contain the most information. While studies (Diether, Lee, and Werner, 2007) document that short sellers follow periods of positive past returns, we find that short sellers generally use larger sizes after periods of higher returns both at the intradaily and daily levels. Further, we show that larger short sales are better able to predict negative returns than smaller short sales, indicating that informed short sellers do not attempt to disguise their information in smaller trades (stealth trade) and instead prefer using larger trade sizes.
Keywords: Stealth Trading, Short Selling
Suggested Citation: Suggested Citation