Biased Shorts: Short Sellers’ Disposition Effect and Limits to Arbitrage

54 Pages Posted: 4 Nov 2015 Last revised: 7 Jul 2021

See all articles by Bastian von Beschwitz

Bastian von Beschwitz

Board of Governors of the Federal Reserve System

Massimo Massa

INSEAD - Finance

Date Written: November, 2015

Abstract

We investigate whether short sellers are subject to the disposition effect using a novel dataset that allows to identify the closing of short positions. Consistent with the disposition effect, short sellers are more likely to close a position the higher their capital gains. Furthermore, stocks with high short sale capital gains experience negative returns, suggesting that their disposition effect has an effect on stock prices. A trading strategy based on this finding achieves significant three-factor alphas. Overall, short sellers? behavioral biases limit their ability to arbitrage away the mispricing caused by the disposition effect of other market participants.

Suggested Citation

von Beschwitz, Bastian and Massa, Massimo, Biased Shorts: Short Sellers’ Disposition Effect and Limits to Arbitrage (November, 2015). International Finance Discussion Paper No. 1147, Available at SSRN: https://ssrn.com/abstract=2686074 or http://dx.doi.org/10.17016/IFDP.2015.1147

Bastian Von Beschwitz (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

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