Common Short Selling and Excess Comovement

47 Pages Posted: 30 Oct 2017 Last revised: 7 Mar 2022

See all articles by Marco Valerio Geraci

Marco Valerio Geraci

National Bank of Belgium

Jean-Yves Gnabo

University of Namur

David Veredas

Vlerick Business School

Date Written: March 4, 2022

Abstract

We show that common short sold capital can explain future four-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 explanations that could give rise to this result. Contrary to the predictions of price pressure, we find that the relationship weakens significantly with stock illiquidity. Instead, consistent with the informed trading hypothesis, the relationship is stronger when short positions originate from hedge funds, from active investors, and from short sellers with high past performance. Stocks connected by common short sellers are associated with non-transitory negative cumulative abnormal returns. Finally, we show that our results can be used to obtain diversifications benefits.

Keywords: short selling, correlation, informed trading

JEL Classification: G14

Suggested Citation

Geraci, Marco Valerio and Gnabo, Jean-Yves and Veredas, David, Common Short Selling and Excess Comovement (March 4, 2022). Available at SSRN: https://ssrn.com/abstract=3061152 or http://dx.doi.org/10.2139/ssrn.3061152

Marco Valerio Geraci (Contact Author)

National Bank of Belgium ( email )

Boulevard de Berlaimont 14
Brussels, Brussels 1000
Belgium

Jean-Yves Gnabo

University of Namur ( email )

Rempart de la Vierge, 8
Namur B-5000
Belgium

David Veredas

Vlerick Business School ( email )

Library
REEP 1
Gent, BE-9000
Belgium

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