Role of Short Sellers in Price Formation - the Weekend Effect

32 Pages Posted: 22 Mar 2002

See all articles by Honghui Chen

Honghui Chen

Department of Finance, University of Central Florida

Vijay Singal

Virginia Tech

Date Written: January 2002

Abstract

In this paper, we argue that short sellers affect prices in a significant and systematic manner. In particular, we contend that speculative short sales contribute to the weekend effect: the inability to trade over the weekend is likely to cause these short sellers to close many of their speculative positions on Fridays and reestablish new short positions on Mondays causing stock prices to rise on Fridays and fall on Mondays.

We find evidence in support of this hypothesis: the weekend effect is significantly larger for high short-interest stocks than for low short-interest stocks. Further, we find that the likely substitution of speculative short sales by put options results in the weekend effect to diminish for stocks with actively traded options, but to continue for other stocks. An analysis of several special types of stocks, viz. IPOs, zero short-interest stocks, and highly volatile stocks, reveals support for the hypothesis.

JEL Classification: G14

Suggested Citation

Chen, Honghui and Singal, Vijay, Role of Short Sellers in Price Formation - the Weekend Effect (January 2002). Available at SSRN: https://ssrn.com/abstract=302718 or http://dx.doi.org/10.2139/ssrn.302718

Honghui Chen

Department of Finance, University of Central Florida ( email )

PO Box 161400
Orlando, FL 32816
United States
407-823-0895 (Phone)

Vijay Singal (Contact Author)

Virginia Tech ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States
5402317750 (Phone)

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