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Aggregate short selling, commonality, and stock market returns

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  • Lynch, Andrew
  • Nikolic, Biljana
  • Yan, Xuemin (Sterling)
  • Yu, Han

Abstract

Using a comprehensive data set of short-sale transactions, we find strong evidence of commonality in daily shorting flows of individual stocks. More importantly, we find that aggregate shorting forecasts market returns. A one standard deviation increase in daily aggregate shorting is associated with a decrease in market excess return by up to 36bps over the following 10 trading days (9% annualized). In addition, we find modest evidence that short sellers are informed about future aggregate earnings news, macroeconomic news, and investor sentiment. Overall, our results are consistent with short sellers possessing superior short-term market-wide information.

Suggested Citation

  • Lynch, Andrew & Nikolic, Biljana & Yan, Xuemin (Sterling) & Yu, Han, 2014. "Aggregate short selling, commonality, and stock market returns," Journal of Financial Markets, Elsevier, vol. 17(C), pages 199-229.
    • Handle: RePEc:eee:finmar:v:17:y:2014:i:c:p:199-229
    DOI: 10.1016/j.finmar.2013.05.001
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    Cited by:

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    3. He, Jingbin & Ma, Xinru & Wei, Qu, 2022. "Firm-level short selling and the local COVID-19 pandemic: Evidence from China," Economic Modelling, Elsevier, vol. 113(C).
    4. Sobaci, Cihat & Sensoy, Ahmet & Erturk, Mutahhar, 2014. "Impact of short selling activity on market dynamics: Evidence from an emerging market," Journal of Financial Stability, Elsevier, vol. 15(C), pages 53-62.
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    6. Ye, Qing & Zhou, Shengjie & Zhang, Jie, 2020. "Short-selling, margin-trading, and stock liquidity: Evidence from the Chinese stock markets," International Review of Financial Analysis, Elsevier, vol. 71(C).
    7. Banerjee, Ameet Kumar & Sensoy, Ahmet & Rahman, Molla Ramizur & Palma, Alessia, 2024. "Commonality in volatility among green, brown, and sustainable energy indices," Finance Research Letters, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Aggregate Short Selling; Market return; Commonality;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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