Role of Speculative Short Sales in Price Formation: Case of the Weekend Effect
Department of Finance, University of Central Florida
Journal of Finance, Vol. 58, No. 2, April 2003
We argue that short sellers affect prices in a significant and systematic manner. In particular, we contend that speculative short sales contribute to the weekend effect: the inability to trade over the weekend is likely to cause these short sellers to close their speculative positions on Fridays and reestablish new short positions on Mondays causing stock prices to rise on Fridays and fall on Mondays. We find evidence in support of this hypothesis based on a comparison of high short-interest stocks and low short-interest stocks, stocks with and without actively traded options, IPOs, zero short-interest stocks, and highly volatile stocks.
Keywords: short sellers, short sales, weekend, options, seasonality
JEL Classification: G14
Date posted: May 26, 2003