Is Regulatory Short Sale Data a Profitable Predictor of UK Stock Returns?

Abstract

Regulator-required public disclosures of net short positions do not provide a profitable investment signal for UK stocks. While long-short (zero initial outlay) portfolios based on this signal usually make a profit on average, it is rarely statistically significant in either gross or risk-adjusted terms. The issue is that the short sides of the portfolios make substantial losses. This is true even when using information in the trend in disclosures to form portfolios, rather than using the most recent disclosures, which is a more standard procedure. Unit initial outlay portfolios based on the disclosures that are allowed to take short positions do not reliably significantly outperform the market. Certain long-only unit initial outlay portfolios based on the disclosures do reliably significantly outperform the market. However, this out-performance is economically modest: about 1 percentage point a year in gross and risk-adjusted terms.

Keywords: Short Sales, Short Selling Regulation, Net Short Position Disclosure, Investment Signal, Anomaly

JEL Classification: G11, G14