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Biased short: Short sellers' disposition effect and limits to arbitrage

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  • von Beschwitz, Bastian
  • Massa, Massimo

Abstract

We investigate whether short sellers are subject to the disposition effect. Consistent with the disposition effect, short sellers are less likely to close a position after experiencing capital losses. This tendency is associated with lower profitability, suggesting a behavioral bias. Furthermore, this tendency is weaker when short sells are likely part of a long-short strategy. In addition, the closing pattern of short sellers exhibits a hump shape relative to capital gains, the opposite of what has been established for individual long-only investors. Overall, short sellers' behavioral biases limit their ability to arbitrage away mispricing caused by other traders' disposition effect.

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  • von Beschwitz, Bastian & Massa, Massimo, 2020. "Biased short: Short sellers' disposition effect and limits to arbitrage," Journal of Financial Markets, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:finmar:v:49:y:2020:i:c:s1386418118302453
    DOI: 10.1016/j.finmar.2019.100512
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    More about this item

    Keywords

    Disposition effect; Behavioral finance; Short selling;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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