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Days to Cover and Stock Returns

63 Pages Posted: 26 Feb 2015 Last revised: 11 Nov 2016

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Frank Weikai Li

Singapore Management University - Lee Kong Chian School of Business

Sophie X. Ni

Hong Kong Baptist University (HKBU); Hong Kong University of Science and Technology

Jose A. Scheinkman

Columbia University; Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Philip Yan

Quantitative Investment Strategies, Goldman Sachs Asset Management

Multiple version iconThere are 2 versions of this paper

Date Written: August 2016

Abstract

A crowded trade emerges when speculators' positions are large relative to the asset's liquidity, making exit difficult. We study this problem of recent regulatory concern by focusing on short-selling. We show that days to cover (DTC), the ratio of short interest to trading volume, measures the costliness of exiting crowded trades. Crowding is an important concern as short-sellers avoid illiquid stocks, which we establish using an instrumental-variables strategy involving staggered stock market decimalization reforms. Arbitrageurs require a premium to enter into such trades as a strategy shorting high DTC stocks and buying low DTC stocks generates a 1.2% monthly return. A smaller days-to-cover effect also exists on the long positions of levered hedge funds.

Keywords: Days to Cover, Crowded Trades, Stock Returns

JEL Classification: G12, G14

Suggested Citation

Hong, Harrison G. and Li, Frank Weikai and Ni, Sophie X. and Scheinkman, Jose A. and Yan, Philip, Days to Cover and Stock Returns (August 2016). 29th Australasian Finance and Banking Conference 2016. Available at SSRN: https://ssrn.com/abstract=2568768 or http://dx.doi.org/10.2139/ssrn.2568768

Harrison G. Hong (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Frank Weikai Li

Singapore Management University - Lee Kong Chian School of Business ( email )

Lee Kong Chian School of Business, Singapore Manag
50 Stamford Rd, #4046
Singapore, 178899
Singapore

Sophie Xiaoyan Ni

Hong Kong Baptist University (HKBU) ( email )

Kowloon
Hong Kong

Hong Kong University of Science and Technology ( email )

Clearwater Bay
Kowloon
Hong Kong
852-2358 5052 (Phone)

HOME PAGE: http://sophiexni.googlepages.com

Jose A. Scheinkman

Columbia University ( email )

420 W. 118th Street
New York, NY 10027
United States

HOME PAGE: http://www.princeton.edu/~joses

Princeton University - Department of Economics ( email )

26 Prospect Avenue
Princeton, NJ 08544
United States
609-258-4020 (Phone)
609-258-6419 (Fax)

HOME PAGE: http://www.princeton.edu/~joses

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Philip Yan

Quantitative Investment Strategies, Goldman Sachs Asset Management ( email )

200 West Street
New York, NY 10282
United States

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