Aggregate Short Selling, Commonality, and Stock Market Returns
Posted: 14 May 2014 Last revised: 15 May 2014
Date Written: May 3, 2013
Using a comprehensive data set of short-sale transactions, we find strong evidence of commonality in daily shorting flows of individual stocks. More importantly, we find that aggregate shorting forecasts market returns. A one standard deviation increase in daily aggregate shorting is associated with a decrease in market excess return by up to 36 bps over the following 10 trading days (9% annualized). In addition, we find modest evidence that short sellers are informed about future aggregate earnings news, macroeconomic news, and investor sentiment. Overall, our results are consistent with short sellers possessing superior short-term market-wide information.
Keywords: Aggregate Short Selling; Market return; Commonality
JEL Classification: G10; G14
Suggested Citation: Suggested Citation