Surprise in Short Interest

57 Pages Posted: 24 Nov 2020

See all articles by Matthias X. Hanauer

Matthias X. Hanauer

Technische Universität München (TUM); Robeco Quantitative Investments

Pavel Lesnevski

University of Mannheim - Department of International Finance

Esad Smajlbegovic

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

Date Written: November 23, 2020

Abstract

We extract the news component of short-selling activity by accounting for important cross-sectional, distributional differences in short interest. The resulting measure of surprise in short interest negatively predicts the cross section of both U.S. and international equity returns. Our results also indicate that this predictability originates from short sellers' informed trading on mispricing and the market's underreaction to the news component of short-sale reports. Consistent with the notion of costly arbitrage, the return predictability is stronger among illiquid, volatile stocks and stocks with high information uncertainty, but importantly, unrelated short-selling frictions.

Keywords: informed short selling, fundamentals, mispricing

JEL Classification: G12, G14, G23

Suggested Citation

Hanauer, Matthias Xaver and Lesnevski, Pavel and Smajlbegovic, Esad, Surprise in Short Interest (November 23, 2020). Available at SSRN: https://ssrn.com/abstract=3736891 or http://dx.doi.org/10.2139/ssrn.3736891

Matthias Xaver Hanauer (Contact Author)

Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80290
Germany

HOME PAGE: http://www.professors.wi.tum.de/fm/team/researcher/dr-matthias-hanauer-cfa/

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

HOME PAGE: http://www.robeco.com/en/insights/authors/matthias-hanauer.html

Pavel Lesnevski

University of Mannheim - Department of International Finance ( email )

L9, 1-2
Mannheim, 68131
Germany

Esad Smajlbegovic

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

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

HOME PAGE: http://sites.google.com/site/esmajlbe/

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