Short-Sale Strategies and Return Predictability

Posted: 25 Jan 2009

See all articles by Karl B. Diether

Karl B. Diether

Independent

Kuan-Hui Lee

Seoul National University Business School

Ingrid M. Werner

The Ohio State University - Fisher College of Business

Abstract

We examine short selling in US stocks based on new SEC-mandated data for 2005. There is a tremendous amount of short selling in our sample: short sales represent 24% of NYSE and 31% of Nasdaq share volume. Short sellers increase their trading following positive returns and they correctly predict future negative abnormal returns. These patterns are robust to controlling for voluntary liquidity provision and for opportunistic risk-bearing by short sellers. The results are consistent with short sellers trading on short-term overreaction of stock prices. A trading strategy based on daily short-selling activity generates significant positive returns during the sample period.

Keywords: G12, G14

Suggested Citation

Diether, Karl B. and Lee, Kuan-Hui and Werner, Ingrid M., Short-Sale Strategies and Return Predictability. The Review of Financial Studies, Vol. 22, No. 2, pp. 575-607, 2009. Available at SSRN: https://ssrn.com/abstract=1331872 or http://dx.doi.org/hhn047

Karl B. Diether (Contact Author)

Independent

No Address Available

Kuan-Hui Lee

Seoul National University Business School ( email )

703 LG-bldg, Business School,
Seoul National Univ., 1 Kwanak-Ro, Kwanak-Gu
Seoul, 151-916
Korea, Republic of (South Korea)
+82 2 880-6924 (Phone)

HOME PAGE: http://sites.google.com/site/kuanlee70/

Ingrid M. Werner

The Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-6460 (Phone)
614-292-2418 (Fax)

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