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

Common Short Selling and Excess Comovement

WP Number: 2034

Abstract: We show that common short sold capital can explain future six-factor excess return correlation one month ahead, controlling for many pair characteristics, including similarities in size, book-to-market, and momentum. We explore the possible mechanisms that could give rise to this relationship. We find that price pressure cannot explain the uncovered relationship. Rather, the relationship is consistent with informed trading, which we identify using additional profiling data for short sellers.

Keywords: short selling, comovement, hedge funds

JEL Codes: G12 G14

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PDF: wp2034.pdf

Theme: empirical