All are Smart: Do Short Sellers Convey More Information than Option Investors?

45 Pages Posted: 18 Mar 2011

See all articles by Kalok Chan

Kalok Chan

CUHK Business School

Hung Wan Kot

University of Macau - Department of Finance and Business Economics

Sophie Xiaoyan Ni

Hong Kong Baptist University (HKBU)

Date Written: March 15, 2011

Abstract

We provide a comprehensive comparison of equity short-selling activity and option market activity in predicting future returns. Three variables are constructed, namely the equity short interest ratio (SIR), put-call open interest ratio (PCOIR), and put-call buy volume ratio (PCBVR). The difference between abnormal returns (based on 4-factor risk adjustment model) to the lowest SIR and highest SIR decile portfolios is 1.27% in the first month, while the corresponding differences are 0.91% and 1.78% for PCOIR and PCBVR portfolios, respectively. Based on double-sort portfolio approach and cross-sectional regressions of returns on individual stocks, we find the predictive ability of PCOIR diminishes after controlling for SIR, while the predictive ability of PCBVR persists and even subsumes that of SIR. We find that a high level of institutional ownership will dampen the predictive ability of SIR, and PCOIR and PCBVR as well. While the SIR can predict future returns up to 9 to 12 months, the predictive power might not be all related to information, but simply reflects some omitted firm characteristics.

Keywords: Short Sale Constraints, Price Discovery, Options, Derivatives

JEL Classification: G12, G11, G14

Suggested Citation

Chan, Kalok and Kot, Hung Wan and Ni, Sophie Xiaoyan, All are Smart: Do Short Sellers Convey More Information than Option Investors? (March 15, 2011). Available at SSRN: https://ssrn.com/abstract=1786326 or http://dx.doi.org/10.2139/ssrn.1786326

Kalok Chan

CUHK Business School ( email )

Hong Kong
852 3943 9988 (Phone)

Hung Wan Kot

University of Macau - Department of Finance and Business Economics ( email )

Macau

Sophie Xiaoyan Ni (Contact Author)

Hong Kong Baptist University (HKBU) ( email )

Kowloon
Hong Kong

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

Register to save articles to
your library

Register

Paper statistics

Downloads
64
Abstract Views
428
rank
339,490
PlumX Metrics