46 Pages Posted: 15 Apr 2005 Last revised: 21 Apr 2014
Date Written: March 28, 2011
This paper studies the response of arbitrageurs to adverse price shocks. We focus on short sellers and find that they cover their positions after suffering losses and increase them after experiencing gains. While this relationship is very strong for positions established due to perceived overvaluation, it does not hold for arbitrage trades, where the investor is hedged against stock price movements. Finally, expected returns do not explain the documented behavior, with short sellers actually losing money by closing their positions in response to losses. We interpret these results as evidence that even sophisticated investors cannot or are not willing to maintain positions after adverse market movements, making arbitrage less effective in moving prices towards their fundamental value.
Keywords: Short Selling, Limits to Arbitrage, Arbitrageurs
JEL Classification: G12, G14
Suggested Citation: Suggested Citation
Savor, Pavel G. and Gamboa-Cavazos, Mario, Holding on to Your Shorts: When Do Short Sellers Retreat? (March 28, 2011). Available at SSRN: https://ssrn.com/abstract=689162 or http://dx.doi.org/10.2139/ssrn.689162
By Eli Ofek