Down But Not Out: Plenty of Returns Available for Shorted Down Stocks

36 Pages Posted: 21 May 2020

See all articles by Emilios C. Galariotis

Emilios C. Galariotis

Audencia Business School ; Audencia Nantes School of Management

Bob Li

Deakin University - Faculty of Business and Law

Daniel Chai

Monash University

Date Written: May 1, 2019

Abstract

Unlike in other developed equity markets, short sellers in Australia are required to report their covered short positions on a daily basis to the market regulator, who subsequently disseminates this information freely to the public in a very timely manner. If short selling contains negative information, a strategy that longs (shorts) stocks with low (high) short selling interest should result in positive returns. This study examines the profitability of such a strategy, named the short selling interest momentum trading strategy. The results indicate that significant returns can be made by following short sellers’ actions ex post. Further, stronger returns are made from price momentum winner stocks and short sellers behave rationally towards short selling activities. The findings from this study are robust to various controls relating to size, industry, price momentum and options.

Keywords: short selling, trading strategy, momentum, anomaly, behaviour

JEL Classification: G1, G4

Suggested Citation

Galariotis, Emilios C. and Li, Bob and Chai, Daniel, Down But Not Out: Plenty of Returns Available for Shorted Down Stocks (May 1, 2019). International Review of Financial Analysis, Vol. 63, Pages 296-306, 2019, Available at SSRN: https://ssrn.com/abstract=3584501

Emilios C. Galariotis (Contact Author)

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

HOME PAGE: http://faculte-recherche.audencia.com/en/faculty/faculty-member-cvs/emilios-galariotis/

Audencia Nantes School of Management ( email )

France

HOME PAGE: http://faculte-recherche.audencia.com/en/faculty/faculty-member-cvs/emilios-galariotis/

Bob Li

Deakin University - Faculty of Business and Law ( email )

Burwood, Victoria 3215
Australia

Daniel Chai

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

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