Do arbitrageurs amplify economic shocks?

Harrison Hong, Jeffrey David Kubik, Tal Fishman

Research output: Contribution to journalArticle

18 Citations (Scopus)

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 languageEnglish (US)
Pages (from-to)454-470
Number of pages17
JournalJournal of Financial Economics
Volume103
Issue number3
DOIs
StatePublished - Mar 2012

Fingerprint

Economic shocks
News
Short interest
Quasi-experiment
Equity markets
Asset value
Speculators
Overshoot

Keywords

  • Destabilizing arbitrage
  • Leverage
  • Short covering
  • Shorting

ASJC Scopus subject areas

  • Accounting
  • Strategy and Management
  • Economics and Econometrics
  • Finance

Cite this

Do arbitrageurs amplify economic shocks? / Hong, Harrison; Kubik, Jeffrey David; Fishman, Tal.

In: Journal of Financial Economics, Vol. 103, No. 3, 03.2012, p. 454-470.

Research output: Contribution to journalArticle

Hong, Harrison ; Kubik, Jeffrey David ; Fishman, Tal. / Do arbitrageurs amplify economic shocks?. In: Journal of Financial Economics. 2012 ; Vol. 103, No. 3. pp. 454-470.
@article{84cb357fd4814c789eab913bf540477a,
title = "Do arbitrageurs amplify economic shocks?",
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.",
keywords = "Destabilizing arbitrage, Leverage, Short covering, Shorting",
author = "Harrison Hong and Kubik, {Jeffrey David} and Tal Fishman",
year = "2012",
month = "3",
doi = "10.1016/j.jfineco.2011.10.007",
language = "English (US)",
volume = "103",
pages = "454--470",
journal = "Journal of Financial Economics",
issn = "0304-405X",
publisher = "Elsevier",
number = "3",

}

TY - JOUR

T1 - Do arbitrageurs amplify economic shocks?

AU - Hong, Harrison

AU - Kubik, Jeffrey David

AU - Fishman, Tal

PY - 2012/3

Y1 - 2012/3

N2 - 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.

AB - 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.

KW - Destabilizing arbitrage

KW - Leverage

KW - Short covering

KW - Shorting

UR - http://www.scopus.com/inward/record.url?scp=84855510841&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84855510841&partnerID=8YFLogxK

U2 - 10.1016/j.jfineco.2011.10.007

DO - 10.1016/j.jfineco.2011.10.007

M3 - Article

VL - 103

SP - 454

EP - 470

JO - Journal of Financial Economics

JF - Journal of Financial Economics

SN - 0304-405X

IS - 3

ER -