Short Interest and Aggregate Stock Returns: International Evidence

Abstract

I find that short interest significantly and negatively predicts aggregate stock returns in 24 out of 32 countries examined. This predictability survives out-of-sample tests, persists outside recessions, and is not subsumed by other well-known return predictors. The results indicate that short interest contains valuable information for forecasting international market returns that is distinct and more powerful than that of other globally available predictors. However, the predictive power of short interest varies over time and across regions. It is higher around economic downturns when margin requirements tighten and in regions where local short sale regulations or equity lending market frictions limit short-selling activities. These results suggest that these constraints affect predominantly uninformed short sellers, thus making the remainder shorts more informed.

Keywords: short selling, return predictability, short sale regulations, short sale constraints

JEL Classification: G12, G14, G15, G17