Role of Speculative Short Sales in Price Formation: Case of the Weekend Effect

Posted: 26 May 2003  

Honghui Chen

Department of Finance, University of Central Florida

Vijay Singal

Virginia Tech

Abstract

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

Suggested Citation

Chen, Honghui and Singal, Vijay, Role of Speculative Short Sales in Price Formation: Case of the Weekend Effect. Journal of Finance, Vol. 58, No. 2, April 2003. Available at SSRN: https://ssrn.com/abstract=404140

Honghui Chen

Department of Finance, University of Central Florida ( email )

PO Box 161400
Orlando, FL 32816
United States
407-823-0895 (Phone)

Vijay Singal (Contact Author)

Virginia Tech ( email )

Blacksburg, VA 24061
United States
5402317750 (Phone)

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