Do arbitrageurs amplify economic shocks?

Harrison Hong, Jeffrey D. Kubik, Tal Fishman

Research output: Contribution to journalArticle

23 Scopus citations

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

Keywords

  • Destabilizing arbitrage
  • Leverage
  • Short covering
  • Shorting

ASJC Scopus subject areas

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

Fingerprint Dive into the research topics of 'Do arbitrageurs amplify economic shocks?'. Together they form a unique fingerprint.

  • Cite this