42 Pages Posted: 27 Aug 2018 Last revised: 14 Feb 2019
Date Written: February 11, 2019
We construct a novel measure of the closing of short positions using the identity:
Short Covering_t-1 = Short Volume_t-1 - (Short Interest_t - Short Interest_t-1):
Our measure provides the first empirical evidence on short covering in U.S. equities. We find that short sellers are more likely to cover their positions following price increases and loan fee increases. Moreover, short sellers often close their positions too early and periods with high short covering are associated with worse price efficiency and more mispricing. Our findings suggest limits to arbitrage are a significant determinant of short covering which, in turn, affects asset prices.
Keywords: Informed trading, limits to arbitrage, return predictability, short covering, short interest, short volume
JEL Classification: G12, G14
Suggested Citation: Suggested Citation