Holding on to Your Shorts: When Do Short Sellers Retreat?

46 Pages Posted: 15 Apr 2005 Last revised: 21 Apr 2014

See all articles by Pavel G. Savor

Pavel G. Savor

DePaul University - Kellstadt Graduate School of Business

Mario Gamboa-Cavazos

Harvard University; AQR Capital Management, LLC

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

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

Pavel G. Savor (Contact Author)

DePaul University - Kellstadt Graduate School of Business ( email )

1 E. Jackson Blvd.
Chicago, IL
United States

Mario Gamboa-Cavazos

Harvard University ( email )

Littauer Center
Cambridge, MA 02138
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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