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Common short selling and excess comovement: Evidence from a sample of LSE stocks

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  • Geraci, Marco Valerio
  • Gnabo, Jean-Yves
  • Veredas, David

Abstract

For a sample of 356 LSE stocks from the period 2013–2019, we find that common short sold capital is positively and significantly associated with one-month ahead four-factor residual return correlation, controlling for many pair characteristics, including similarities in size, book-to-market, and momentum. The relation weakens with stock illiquidity, whereas it strengthens when short positions originate from informed agents, such as hedge funds, active investors, and short sellers with high past performance. This supports our hypothesis that the relation is driven by information, not price pressure. We show that these results can be used to obtain diversification benefits.

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  • Geraci, Marco Valerio & Gnabo, Jean-Yves & Veredas, David, 2023. "Common short selling and excess comovement: Evidence from a sample of LSE stocks," Journal of Financial Markets, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:finmar:v:65:y:2023:i:c:s1386418123000319
    DOI: 10.1016/j.finmar.2023.100833
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    Cited by:

    1. Michael Ashby, 2024. "Are Regulatory Short Sale Data a Profitable Predictor of UK Stock Returns?," JRFM, MDPI, vol. 17(8), pages 1-33, July.
    2. Shen, Yiwen & Shi, Meiqi, 2024. "Intraday variation in cross-sectional stock comovement and impact of index-based strategies," Journal of Financial Markets, Elsevier, vol. 68(C).

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    More about this item

    Keywords

    Short selling; Comovement; Hedge funds;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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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