Short Selling in Extreme Events

Posted: 3 Sep 2016 Last revised: 23 Feb 2019

See all articles by Marco Valerio Geraci

Marco Valerio Geraci

University of Cambridge - Cambridge-INET Institute

David Veredas

Vlerick Business School

Tomas Garbaravicius

European Central Bank (ECB)

Date Written: Dec 2018

Abstract

We study the association between daily changes in short selling activity and financial stock prices during extreme events using TailCoR, a measure of tail correlation. For the largest European and US banks, as well as European insurers, we uncover a strong relation during exceptional (extreme) days and a weak relation during normal (average) days. Examining days with large increases in short positions and large downfalls in stock prices, we find evidence of both momentum and contrarian short selling taking place. For North American bank stocks, contrarian short selling appears more practiced than for European bank and insurance stocks. We find that the uncovered relationship decreases with firm size and increases during ban periods, which is in line with short selling becoming more informative when constrained.

Keywords: short selling, tail correlation

JEL Classification: G15, G18, G28

Suggested Citation

Geraci, Marco Valerio and Veredas, David and Garbaravicius, Tomas, Short Selling in Extreme Events (Dec 2018). Journal of Financial Stability, Vol. 39, 2018, Available at SSRN: https://ssrn.com/abstract=2833352 or http://dx.doi.org/10.2139/ssrn.2833352

Marco Valerio Geraci (Contact Author)

University of Cambridge - Cambridge-INET Institute ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

David Veredas

Vlerick Business School ( email )

Library
REEP 1
Gent, BE-9000
Belgium

Tomas Garbaravicius

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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