Aggressive Short Selling and Price Reversals

46 Pages Posted: 21 Mar 2007 Last revised: 7 Feb 2011

See all articles by Andriy Shkilko

Andriy Shkilko

Wilfrid Laurier University - Lazaridis School of Business and Economics

Bonnie F. Van Ness

University of Mississippi - Department of Finance

Robert A. Van Ness

University of Mississippi - Department of Finance

Date Written: March 1, 2008

Abstract

We show that short selling may, occasionally, cause excessive price pressure. We study large negative price reversals that occur on no-news days and find that short selling during such reversals is abnormally aggressive and substantially increases the magnitude of price declines. This negative effect on prices extends beyond a mere selling pressure from aggressive sell orders. Consistent with extant theories of predatory trading, price reversals are also accompanied by aggressive non-short selling. Large price reversals are more likely to occur in the stocks for which short selling restrictions are lifted; however, even when restrictions apply, traders often successfully circumvent them.

Keywords: Short selling, price reversals, speculative and predatory trading, order imbalances

JEL Classification: G14, G19

Suggested Citation

Shkilko, Andriy and Van Ness, Bonnie F. and Van Ness, Robert A., Aggressive Short Selling and Price Reversals (March 1, 2008). AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=971210 or http://dx.doi.org/10.2139/ssrn.971210

Andriy Shkilko (Contact Author)

Wilfrid Laurier University - Lazaridis School of Business and Economics ( email )

LH 4050
75 University Ave. W.
Waterloo, Ontario N2L3C5
Canada
519.884.0710 ext. 2462 (Phone)
519.884.0201 (Fax)

Bonnie F. Van Ness

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States
662-915-6749 (Phone)
662-915-7968 (Fax)

Robert A. Van Ness

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States

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