Short Covering

42 Pages Posted: 27 Aug 2018 Last revised: 14 Feb 2019

See all articles by Jesse Blocher

Jesse Blocher

Vanderbilt University - Finance

Matthew Ringgenberg

University of Utah - Department of Finance

Date Written: February 11, 2019

Abstract

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

Blocher, Jesse and Ringgenberg, Matthew C., Short Covering (February 11, 2019). 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

Matthew C. Ringgenberg (Contact Author)

University of Utah - Department of Finance ( email )

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

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