Short Trading and Short Investing
47 Pages Posted: 18 Dec 2017 Last revised: 15 Oct 2020
Date Written: October 14, 2020
Short selling is measured in the literature as both constraint (e.g., lending fees) and activity (e.g., trades). We show that these two measures capture separate effects, which we characterize into two different strategies. The first strategy, "short trading," has minimal constraints, weekly scale return predictability and average risk. The second strategy, "short investing," has high constraints, multi-month return predictability and higher risk. Moreover, each strategy incorporates different types of information. Short trading includes short-lived information while short investing includes more long-lived, fundamental information. This diversity in short sellers has implications for both theoretical and empirical research.
Keywords: Informed trading, limits to arbitrage, price efficiency, short constraints, short volume, securities lending
JEL Classification: G12, G14, G23
Suggested Citation: Suggested Citation