Days to Cover and Stock Returns

51 Pages Posted: 18 May 2015

See all articles by Harrison G. Hong

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 Xiaoyan Ni

Hong Kong Baptist University (HKBU)

José 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: May 2015

Abstract

The short ratio - shares shorted to shares outstanding - is an oft-used measure of arbitrageurs’ opinion about a stock’s over-valuation. We show that days-to-cover (DTC), which divides a stock’s short ratio by its average daily share turnover, is a more theoretically well-motivated measure because trading costs vary across stocks. Since turnover falls with trading costs, DTC is approximately the marginal cost of the shorts. At the arbitrageurs’ optimum it equals the marginal benefit, which is their opinion about over-valuation. DTC is a better predictor of poor stock returns than short ratio. A long-short strategy using DTC generates a 1.2% monthly return.

Suggested Citation

Hong, Harrison G. and Li, Frank Weikai and Ni, Sophie Xiaoyan and Scheinkman, José and Yan, Philip, Days to Cover and Stock Returns (May 2015). NBER Working Paper No. w21166. Available at SSRN: https://ssrn.com/abstract=2607356

Harrison G. Hong (Contact Author)

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

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National Bureau of Economic Research (NBER)

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Frank Weikai Li

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

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Singapore

Sophie Xiaoyan Ni

Hong Kong Baptist University (HKBU) ( email )

Kowloon
Hong Kong

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

José Scheinkman

Columbia University ( email )

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United States

Princeton University - Department of Economics ( email )

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Princeton, NJ 08544
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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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