Daily Short Interest, Idiosyncratic Risk, and Stock Returns

46 Pages Posted: 7 Jan 2009

See all articles by Andrea S. Au

Andrea S. Au

State Street Corporation

John A. Doukas

Old Dominion University - Strome College of Business

Zhan M. Onayev

Passport Capital Management

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Date Written: November 28, 2007

Abstract

This paper examines the relation between short selling and returns and the impact of arbitrage costs on short sellers' behavior. Using daily UK short selling data, we find that stocks with low short interest levels experience significant positive returns on both an equal- and value-weighted basis. Economic theory predicts that short sellers avoid establishing positions in stocks with high idiosyncratic risk. Our results indicate a negative relation between short interest and returns among high idiosyncratic risk stocks and that short selling activity is mostly concentrated in low idiosyncratic risk stocks where it is less costly to arbitrage fundamental risk.

Keywords: short interest, short selling, idiosyncratic risk

JEL Classification: G12, G14, G15

Suggested Citation

Au, Andrea S. and Doukas, John A. and Onayev, Zhan M., Daily Short Interest, Idiosyncratic Risk, and Stock Returns (November 28, 2007). Available at SSRN: https://ssrn.com/abstract=968656 or http://dx.doi.org/10.2139/ssrn.968656

Andrea S. Au (Contact Author)

State Street Corporation ( email )

State Street Financial Center
1 Lincoln Street
Boston, MA 02111
United States

John A. Doukas

Old Dominion University - Strome College of Business ( email )

2080 Constant Hall
Suite 2080
Norfolk, VA 23529-0222
United States
757-683-5521 (Phone)

HOME PAGE: http://www.efmaefm.org/0DOUKAS/doukas.php

Zhan M. Onayev

Passport Capital Management ( email )

30 Hotaling Place
San Francisco, CA
United States
415-525-8916 (Phone)

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