Do short sellers amplify extreme market declines?
Year: 2024
Type: article
Abstract: When the market falls sharply, short sellers are criticized for intensifying price declines by manipulative trading that pushes prices below fundamental values. Contrary to this view, we find that increases in institutional and retail short seller's trading on the days of marketwide declines are associated with overpriced stocks . Their trading is economically profitable: a portfolio that buys the least shorted and sells short the most shorted stocks by institutional (retail) investors earns 0.90% (0.79%) risk-adjusted weekly returns. Overall, institutional and retail short sellers adopt valuation-based trading during market-wide declines. • Institutional and retail short sellers trade with the market during sharp market declines. • Institutional and retail short-sellers trading is linked to economically meaningful negative post-event abnormal returns. • Institutional and retail short sellers trade overpriced stocks during sharp market declines, contributing to price discovery.
Source: Pacific-Basin Finance Journal
Authors: Sandun Fernando, Olena Onishchenko, Duminda Kuruppuarachchi
Institutions: Auckland Institute of Studies, University of Otago
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $2,820
Funder: University of Otago
OpenAlex ID: W4401630674