Aggregate Short Selling, Commonality, and Stock Market Returns

Posted: 14 May 2014 Last revised: 15 May 2014

See all articles by Andrew A Lynch

Andrew A Lynch

University of Arkansas - Sam M. Walton College of Business

Biljana Adebambo

University of San Diego

Xuemin Sterling Yan

University of Missouri - Columbia

Han Yu

Southern CT University - Department of Finance

Date Written: May 3, 2013

Abstract

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

Lynch, Andrew A and Adebambo, Biljana and Yan, Xuemin Sterling and Yu, Han, Aggregate Short Selling, Commonality, and Stock Market Returns (May 3, 2013). Journal of Financial Markets, Vol. 17, 2014, Available at SSRN: https://ssrn.com/abstract=2435968

Andrew A Lynch

University of Arkansas - Sam M. Walton College of Business ( email )

Fayetteville, AR 72701
United States

Biljana Adebambo

University of San Diego ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

Xuemin Sterling Yan (Contact Author)

University of Missouri - Columbia ( email )

Robert J. Trulaske Sr. College of Business
427 Cornell Hall
Columbia, MO 65211-2600
United States
573-884-9708 (Phone)
573-884-6296 (Fax)

HOME PAGE: http://business.missouri.edu/yanx/

Han Yu

Southern CT University - Department of Finance ( email )

New Haven, CT 06515
United States

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