Short interest and the asymmetry of the price-volume relationship in the Canadian stock market

Several studies have revealed an asymmetry in the price-volume relationship in the equities markets. This paper verifies this relationship using Canadian data and presents an alternative test of the costly short-sales hypothesis based on the volume of outstanding short interest in the stock market. Contrary to previous studies, the empirical tests in this study do not rely on futures markets data but rather measure and compare the effects of relative short interest positions on the price-volume relationship for positive and negative price changes. The results suggest that the greater the ratio of short positions to the number of shares outstanding, the greater the trading volume associated with price increases relative to that accompanying price decreases.