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Do short sellers amplify extreme market declines?

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  • Fernando, Sandun
  • Onishchenko, Olena
  • Kuruppuarachchi, Duminda

Abstract

When the market falls sharply, short sellers are criticized for intensifying price declines by manipulative trading that pushes prices below fundamental values. Contrary to this view, we find that increases in institutional and retail short seller's trading on the days of marketwide declines are associated with overpriced stocks. Their trading is economically profitable: a portfolio that buys the least shorted and sells short the most shorted stocks by institutional (retail) investors earns 0.90% (0.79%) risk-adjusted weekly returns. Overall, institutional and retail short sellers adopt valuation-based trading during market-wide declines.

Suggested Citation

  • Fernando, Sandun & Onishchenko, Olena & Kuruppuarachchi, Duminda, 2024. "Do short sellers amplify extreme market declines?," Pacific-Basin Finance Journal, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:pacfin:v:87:y:2024:i:c:s0927538x24002506
    DOI: 10.1016/j.pacfin.2024.102498
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    More about this item

    Keywords

    Retail short sellers; Institutional short sellers; Marketwide declines; Overpricing;
    All these keywords.

    JEL classification:

    • 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
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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