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Short Interest and Aggregate Stock Returns

51 Pages Posted: 2 Aug 2014 Last revised: 20 Feb 2016

David Rapach

Saint Louis University - John Cook School of Business

Matthew Ringgenberg

University of Utah - Department of Finance

Guofu Zhou

Washington University in St. Louis - Olin School of Business; CAFR (China Academy for Financial Research)

Date Written: February 10, 2016

Abstract

We show that short interest is arguably the strongest known predictor of aggregate stock returns. It outperforms a host of popular return predictors both in and out of sample, with annual r-squared statistics of 12.89% and 13.24%, respectively. In addition, short interest can generate utility gains of over 300 basis points per annum for a mean-variance investor. A vector autoregression decomposition shows that the economic source of short interest’s predictive power stems predominantly from a cash flow channel. Overall, our evidence indicates that short sellers are informed traders who are able to anticipate future aggregate cash flows and associated market returns.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2675298

Keywords: Equity risk premium; Predictive regression; Short interest; Asset allocation

JEL Classification: C58, G12, G14

Suggested Citation

Rapach, David and Ringgenberg, Matthew and Zhou, Guofu, Short Interest and Aggregate Stock Returns (February 10, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2474930 or http://dx.doi.org/10.2139/ssrn.2474930

David Rapach

Saint Louis University - John Cook School of Business ( email )

3674 Lindell Blvd
St. Louis, MO 63108-3397
United States

Matthew C. Ringgenberg (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

Guofu Zhou

CAFR (China Academy for Financial Research)

Shanghai Advanced Institute of Finance
Shanghai P.R.China, 200030
China

Washington University in St. Louis - Olin School of Business ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

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