Abstract
We test the hypothesis that arbitrageurs amplify economic shocks in equity markets. The ability of speculators to hold short positions depends on asset values. Shorts are often reduced following good news about a stock. Therefore, the prices of highly shorted stocks are excessively sensitive to shocks compared with stocks with little short interest. We confirm this hypothesis using several empirical strategies including two quasi-experiments. In particular, we establish that the price of highly shorted stocks overshoots after good earnings news due to short covering compared with other stocks.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 454-470 |
| Number of pages | 17 |
| Journal | Journal of Financial Economics |
| Volume | 103 |
| Issue number | 3 |
| DOIs | |
| State | Published - Mar 2012 |
Keywords
- Destabilizing arbitrage
- Leverage
- Short covering
- Shorting
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics
- Strategy and Management