From Extinction to Resurrection: Unveiling the Role of Short-Selling Frictions in Cross-Sectional Momentum

37 Pages Posted: 8 Feb 2024

See all articles by Andrea Buraschi

Andrea Buraschi

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Filippo Pellegrino

Imperial College London

Date Written: January 19, 2024

Abstract

An extensive literature supports that a cross-sectional momentum strategy, going long winners and short losers’ stocks, yields substantial abnormal returns. This evidence challenges conventional asset pricing theories and has been considered important evidence against the EMH. Our study reveals that the classic momentum effect has almost disappeared in the last 25 years. We collected data on short interest to investigate the role played by short-selling frictions in this market evolution. Controlling for short interest, the momentum effect re-emerges very persuasively, even in the latest period. These novel results align with the DSGE framework proposed by Scheinkman and Xiong (2003), linking short-selling constraints to the dynamics of asset pricing and aiding in the understanding of the economics of cross-sectional momentum.

Keywords: Empirical Asset Pricing, Momentum, Short-selling frictions

JEL Classification: G10, G11, G14

Suggested Citation

Buraschi, Andrea and Pellegrino, Filippo, From Extinction to Resurrection: Unveiling the Role of Short-Selling Frictions in Cross-Sectional Momentum (January 19, 2024). Available at SSRN: https://ssrn.com/abstract=4700511 or http://dx.doi.org/10.2139/ssrn.4700511

Andrea Buraschi

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www.andreaburaschi.com/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Filippo Pellegrino (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
90
Abstract Views
270
Rank
515,039
PlumX Metrics