Short Selling ETFs

57 Pages Posted: 10 Sep 2016 Last revised: 6 Sep 2019

See all articles by Frank Weikai Li

Frank Weikai Li

Singapore Management University - Lee Kong Chian School of Business

Qifei Zhu

Nanyang Technological University (NTU) - Nanyang Business School

Date Written: May 1, 2018

Abstract

We provide novel evidence that arbitrageurs use exchange-traded funds (ETFs) as an avenue to circumvent short-sale constraints at the stock level. Using a large sample of U.S. equity ETF holdings, we document that shorting activity on ETFs rises with the difficulty of shorting the underlying stocks. Stocks that are heavily shorted via their holding ETFs underperform those lightly shorted by 90 basis points per month. The return predictability of ETF short selling on individual stocks is distinct from stock-level shorting measures, and is concentrated among stocks that face the most severe arbitrage constraints. Our evidence suggests that ETFs improve information efficiency by allowing arbitrageurs to target overpriced stocks that are otherwise difficult to short.

Keywords: ETFs, Short Selling, Equity Lending, Limits to Arbitrage, Market Efficiency

JEL Classification: G12, G14, G23

Suggested Citation

Li, Frank Weikai and Zhu, Qifei, Short Selling ETFs (May 1, 2018). Finance Down Under 2019 Building on the Best from the Cellars of Finance. Available at SSRN: https://ssrn.com/abstract=2836518 or http://dx.doi.org/10.2139/ssrn.2836518

Frank Weikai Li

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Qifei Zhu (Contact Author)

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Singapore, 639798
Singapore

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