Short Selling and Economic Policy Uncertainty
49 Pages Posted: 10 Apr 2017 Last revised: 30 Sep 2017
Date Written: April 6, 2017
We study the trading behavior of short sellers in the presence of economic policy uncertainty (EPU). Daily short selling activity at either the aggregate level or the individual stock level is increasing in the EPU index (Baker, Bloom and Davis, 2016). EPU has great explanatory power for short trading. Cross-sectional tests show that the increase in short interest under high political uncertainty is from shorting stocks characterized by higher mispricing, greater policy sensitivity, higher illiquidity, greater volatility or analyst dispersion. Short sellers earn abnormal profits by trading on public information related to EPU.
Keywords: short selling, economic policy uncertainty, political uncertainty, trading, risk, mispricing
JEL Classification: G10, G12, G18, D80
Suggested Citation: Suggested Citation