Out of Sync: Dispersed Short Selling and the Correction of Mispricing

51 Pages Posted: 17 Dec 2019 Last revised: 25 Nov 2020

See all articles by Antonio Gargano

Antonio Gargano

University of Houston - C.T. Bauer College of Business

Juan M. Sotes-Paladino

Universidad de los Andes, Chile

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: November 30, 2019

Abstract

How synchronized are short sellers? We examine a unique dataset on the distribution of pro fits across a stock's short sellers and find evidence of substantial dispersion in the initiation of their positions. Consistent with this dispersion reflecting "synchronization risk," i.e., uncertainty among short sellers about when others will short sell (Abreu and Brunnermeier, 2002, 2003), more dispersed short selling signals (i) greater stock overpricing; and (ii) longer delays in overpricing correction. These e ffects are prevalent even among stocks facing low short-selling costs or other explicit constraints. Overall, our findings provide novel cross-sectional evidence of synchronization problems among short sellers and their pricing implications.

Keywords: Short Selling, Limits to Arbitrage, Synchronization Risk

JEL Classification: G12, G14

Suggested Citation

Gargano, Antonio and Sotes-Paladino, Juan M. and Verwijmeren, Patrick, Out of Sync: Dispersed Short Selling and the Correction of Mispricing (November 30, 2019). Available at SSRN: https://ssrn.com/abstract=3495970 or http://dx.doi.org/10.2139/ssrn.3495970

Antonio Gargano

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Juan M. Sotes-Paladino (Contact Author)

Universidad de los Andes, Chile ( email )

Chile

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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