Can Short-sellers Predict Returns? Daily Evidence

Preprint
Publisher Website
Google Scholar
Abstract
We test whether short-sellers in Nasdaq-listed stocks are able to predict future returns based on new SEC-mandated data for the first quarter of 2005. There is a tremendous amount of short-term trading strategies involving short-sales during the sample: Short-sales represent 25.1 percent of Nasdaq share volume while monthly short-interest is 3.3 percent of shares outstanding (4.7 days to cover). Short-sellers are on average contrarian - they sell short following positive returns. Increasing short sales predict future negative returns, and the predictive power comes primarily from small trades. A trading strategy based on daily short selling activity generates significant returns, but incurs costs large enough to wipe out any profits. More binding short-sale constraints result in reduced short-selling, but there is only a significant effect on future returns among low priced stocks.

This publication has 0 references indexed in Scilit: