Short Selling and Economic Policy Uncertainty

49 Pages Posted: 10 Apr 2017 Last revised: 30 Sep 2017

See all articles by Xiaping Cao

Xiaping Cao

SUN YAT-SEN UNIVERSITY

Yuchen Wang

Department of Statistics and Finance, University of Science and Technology of China

Sili Zhou

Fanhai International School of Finance and School of Economics, Fudan University

Date Written: April 6, 2017

Abstract

We study the trading behavior of short sellers in the presence of economic policy uncertainty (EPU). Daily short selling activity at either the aggregate level or the individual stock level is increasing in the EPU index (Baker, Bloom and Davis, 2016). EPU has great explanatory power for short trading. Cross-sectional tests show that the increase in short interest under high political uncertainty is from shorting stocks characterized by higher mispricing, greater policy sensitivity, higher illiquidity, greater volatility or analyst dispersion. Short sellers earn abnormal profits by trading on public information related to EPU.

Keywords: short selling, economic policy uncertainty, political uncertainty, trading, risk, mispricing

JEL Classification: G10, G12, G18, D80

Suggested Citation

Cao, Xiaping and Wang, Yuchen and Zhou, Sili, Short Selling and Economic Policy Uncertainty (April 6, 2017). Available at SSRN: https://ssrn.com/abstract=2948291 or http://dx.doi.org/10.2139/ssrn.2948291

Xiaping Cao (Contact Author)

SUN YAT-SEN UNIVERSITY ( email )

135 Xingang Xi Road
Guangzhou, 510275
China
+862084111154 (Phone)

Yuchen Wang

Department of Statistics and Finance, University of Science and Technology of China ( email )

96, Jinzhai Road
Hefei, Anhui 230026
China

HOME PAGE: http://en.business.ustc.edu.cn/

Sili Zhou

Fanhai International School of Finance and School of Economics, Fudan University ( email )

Room 520, Building 5, 220 Handan Road
Shanghai
China

HOME PAGE: http://siliz.weebly.com/

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