Surprise in Short Interest

69 Pages Posted: 24 Nov 2020 Last revised: 19 May 2022

See all articles by Matthias X. Hanauer

Matthias X. Hanauer

Technische Universität München (TUM); Robeco Quantitative Investments

Pavel Lesnevski

Union Investment Institutional GmbH

Esad Smajlbegovic

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM); Tinbergen Institute

Date Written: April 30, 2022

Abstract

We extract the news component of short-selling activity by accounting for important cross-sectional, distributional differences in short interest data. 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 investors' underreaction due to their anchoring on past short interest. Finally, 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 to short-selling frictions.

Keywords: informed short selling, anchoring bias, market efficiency

JEL Classification: G12, G14, G23

Suggested Citation

Hanauer, Matthias Xaver and Lesnevski, Pavel and Smajlbegovic, Esad, Surprise in Short Interest (April 30, 2022). 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

Union Investment Institutional GmbH ( email )

Wiesenhüttenplatz 25
Frankfurt am Main, 60329
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/

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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