Short-Sellers and Short Covering

This study fills an important gap in the literature on loss realization aversion. It shows how a ‘sophisticated’ sub-set of investors, namely short-sellers, react to losses. Using daily data on stock lending, we estimate the average price at which short positions were initiated, thus permitting a study of short-sellers’ responses to their own book losses. We find that short-sellers close their positions in response to losses and not simply in response to rising share prices. This is a key result and a distinction from findings in related research. We conclude that short-sellers do not exhibit an aversion to realizing losses, but instead accept their losses or ‘mistakes’ systematically.