52 Pages Posted: 2 Mar 2007 Last revised: 4 Jun 2011
Date Written: June 1, 2011
We test the hypothesis that arbitrageurs amplify economic shocks in equity markets. The ability of speculators to hold short positions depends on asset values: shorts are often reduced following good news about a stock. Therefore, the prices of highly shorted stocks are excessively sensitive to shocks compared to stocks with little short interest. We confirm this hypothesis using several empirical strategies including two quasi-experiments. In particular, we establish that the price of highly shorted stocks overshoots after good earnings news due to short covering compared to other stocks.
Suggested Citation: Suggested Citation
Hong, Harrison G. and Kubik, Jeffrey D. and Fishman, Tal, Do Arbitrageurs Amplify Economic Shocks? (June 1, 2011). Available at SSRN: https://ssrn.com/abstract=967751 or http://dx.doi.org/10.2139/ssrn.967751
By Andrew Ang