Short Trading and Short Investing
50 Pages Posted: 18 Dec 2017 Last revised: 22 Oct 2018
Date Written: July 13, 2018
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. Because our results show that short constraints are persistent, they have implications for future theoretical research.
Keywords: Informed trading, limits to arbitrage, price efficiency, short constraints, short volume, securities lending
JEL Classification: G12, G14, G23
Suggested Citation: Suggested Citation