Short Covering

57 Pages Posted: 6 Feb 2023 Last revised: 27 Nov 2023

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: August 2, 2023

Abstract

We construct novel measures of net and gross short covering to examine when short sellers exit 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. In contrast, we find little evidence that aggregate limits to arbitrage, including VIX, funding liquidity, and market liquidity, affect short covering. Short covering predicts future returns in the wrong direction, but only if it is induced by limits to arbitrage, consistent with the hypothesis that short sellers are forced to exit too early. It is also associated with lower price efficiency, higher future anomaly returns, and better performance of other informed traders. These results show that firm-level limits to arbitrage are important determinants of trading behavior and future returns.

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., Short Covering (August 2, 2023). 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://dxbaruch.github.io/

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

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