When Do Short Sellers Exit Their Positions?

54 Pages Posted: 27 Aug 2018 Last revised: 18 Nov 2021

See all articles by Jesse Blocher

Jesse Blocher

Vanderbilt University - Finance

Xi Dong

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Matthew C. Ringgenberg

University of Utah - Department of Finance

Pavel G. Savor

DePaul University - Kellstadt Graduate School of Business; affiliation not provided to SSRN

Date Written: November 17, 2021

Abstract

We construct novel measures of gross and net short covering to examine when short sellers exit their positions. We find that idiosyncratic limits to arbitrage, such as adverse stock price movements, volatility, and equity lending fees are associated with significantly higher position closures and lower price efficiency. Moreover, these position closures predict future return movements in the wrong direction, suggesting short sellers may be induced to exit too early. In contrast, we find little evidence that aggregate limits to arbitrage including VIX, funding liquidity, and market volatility affect gross or net short covering. The results show that firm-level limits to arbitrage are important determinants of trading behavior.

Keywords: limits to arbitrage, market efficiency, short sales, short covering

JEL Classification: G12, G14

Suggested Citation

Blocher, Jesse and Dong, Xi and Ringgenberg, Matthew C. and Savor, Pavel G., When Do Short Sellers Exit Their Positions? (November 17, 2021). Available at SSRN: https://ssrn.com/abstract=2634579 or http://dx.doi.org/10.2139/ssrn.2634579

Jesse Blocher

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Xi Dong

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

One Bernard Baruch Way, Box B10-225
New York City, NY 10010
United States

HOME PAGE: http://faculty.baruch.cuny.edu/xdong1/

Matthew C. Ringgenberg (Contact Author)

University of Utah - Department of Finance ( email )

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

Pavel G. Savor

DePaul University - Kellstadt Graduate School of Business ( email )

1 E. Jackson Blvd.
Chicago, IL
United States

affiliation not provided to SSRN

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
655
Abstract Views
2,940
rank
58,153
PlumX Metrics