Common Short Selling and Excess Comovement
Posted: 30 Oct 2017 Last revised: 10 Jul 2020
Date Written: July 4, 2020
We show that common short sold capital can explain future six-factor excess return correlation one month ahead, controlling for many pair characteristics, including similarities in size, book-to-market, and momentum. We explore the possible mechanisms that could give rise to this relationship. We find that the asset class effect cannot explain the uncovered relationship. Rather, the relationship is consistent with the information diffusion view of comovement, which we identify using additional profiling data for short sellers.
Keywords: short selling, correlation, informed trading
JEL Classification: G14
Suggested Citation: Suggested Citation