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Geraci, M. V., Gnabo, J-Y. and Veredas, D.

Common Short Selling and Excess Comovement: Evidence from a Sample of LSE Stocks

WP Number: 2034

Abstract: For the period 2013–2019, and a sample of 356 LSE stocks, we find that common short sold capital is positively and significantly associated with future four-factor residual return correlation, controlling for many pair characteristics, including similarities in size, book-to-market, and momentum. The relationship disappears for illiquid stock pairs, whereas it strengthens when short positions originate from informed agents, such as hedge funds, active investors, and short sellers with high past performance. This supports the hypothesis that the relationship is driven by information, rather than by price pressure. We show that these results can be used to obtain diversification benefits.

Keywords: Comovemen, Hedge Funds, Short Selling

JEL Codes: G11 G12 G14

Author links:

PDF: wp2034.pdf

Open Access Link: 10.17863/CAM.82495

Theme: empirical