Short Interest and Credit Spread Dynamics

Abstract

This study examines the dynamics between short interest and credit spread. Based on the analysis of monthly data from 1931M6 to 2012M12, the results show that credit spread significantly jumps following the shock to the NYSE short-interest ratio. The Granger causality Wald test indicates a causal linkage between credit spread and NYSE short-interest ratio. The findings provide important implications for investment and risk management. The findings allow investors and risk managers to forecast credit spread movement by observing short interest in the equity market.

Keywords: short interest ratio, credit spread, VAR

JEL Classification: G12, G14