Longs, Shorts, and the Cross-Section of Stock Returns

44 Pages Posted: 9 Dec 2016 Last revised: 15 Jan 2019

See all articles by Pedram Nezafat

Pedram Nezafat

Michigan State University

Tao Shen

Tsinghua University

Qinghai Wang

University of Central Florida - College of Business Administration

J. (Julie) Wu

University of Nebraska - Lincoln

Date Written: January 1, 2019

Abstract

We study the cross-section of stock returns with observed short interest and long positions of hedge funds. During the period 1997-2014, 30% of highly shorted stocks also have the highest level of hedge fund holdings. Stocks with both high short interest and high hedge fund holdings do not earn abnormal returns, while stocks with high short interest but low hedge fund holdings or stocks with high hedge fund holding but low short interest exhibit significant abnormal returns. These return patterns are consistent with the notion that stock prices incorporate the expressed views of both the short sellers and active long investors. The evidence highlights that studies of informed trading such as short selling should not ignore the information from the opposite side.

Keywords: Short Selling, Hedge Funds, Stock Returns, Disagreement, Dispersions in Analysts' Forecasts

JEL Classification: G10, J12

Suggested Citation

Nezafat, Pedram and Shen, Tao and Wang, Qinghai and Wu, J. (Julie), Longs, Shorts, and the Cross-Section of Stock Returns (January 1, 2019). Available at SSRN: https://ssrn.com/abstract=2882250 or http://dx.doi.org/10.2139/ssrn.2882250

Pedram Nezafat (Contact Author)

Michigan State University ( email )

MI
United States

Tao Shen

Tsinghua University ( email )

Department of Finance
School of Economics and Management
China

Qinghai Wang

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

J. (Julie) Wu

University of Nebraska - Lincoln ( email )

Lincoln, NE 68588
United States

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