IDEAS home Printed from https://ideas.repec.org/a/taf/apfiec/v10y2000i1p105-116.html
   My bibliography  Save this article

Short positions, size effect, and the liquidity hypothesis: implications for stock performance

Author

Listed:
  • Said Elfakhani

Abstract

This study focuses on the relationship between short interest and subsequent stock returns. It also deals with the question of whether this relationship itself is attributable to firm size. In this context, this study investigates: (1) whether short sellers are correct in their predictions and whether these predictions can benefit other investors, (2) whether returns on short positions are related to firm size, and (3) whether the liquidity hypothesis or the differential information hypothesis can explain the relationship between firm size and short selling. The results support the notion that short sellers made correct predictions of price movements during the sampling period, 1986-1990. The results also show that following the monthly report of short interests, investors can still earn higher returns on shorted stocks, especially the small ones. Finally, the results maintain that short interest positions on less-liquid overpriced small stocks are more profitable than more-liquid overpriced large stocks, thus supporting the liquidity hypothesis. Overall these findings do not display seasonal differences, especially in January.

Suggested Citation

  • Said Elfakhani, 2000. "Short positions, size effect, and the liquidity hypothesis: implications for stock performance," Applied Financial Economics, Taylor & Francis Journals, vol. 10(1), pages 105-116.
    • Handle: RePEc:taf:apfiec:v:10:y:2000:i:1:p:105-116
    DOI: 10.1080/096031000331978
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/096031000331978
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/096031000331978?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Schwert, G William & Seguin, Paul J, 1990. "Heteroskedasticity in Stock Returns," Journal of Finance, American Finance Association, vol. 45(4), pages 1129-1155, September.
    3. Brent, Averil & Morse, Dale & Stice, E. Kay, 1990. "Short Interest: Explanations and Tests," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(2), pages 273-289, June.
    4. Barry, Christopher B. & Brown, Stephen J., 1984. "Differential information and the small firm effect," Journal of Financial Economics, Elsevier, vol. 13(2), pages 283-294, June.
    5. Assogbavi, T. & Khoury, N. & Yourougou, P., 1995. "Short interest and the asymmetry of the price-volume relationship in the Canadian stock market," Journal of Banking & Finance, Elsevier, vol. 19(8), pages 1341-1358, November.
    6. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    7. Figlewski, Stephen, 1981. "The Informational Effects of Restrictions on Short Sales: Some Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(4), pages 463-476, November.
    8. Banz, Rolf W & Breen, William J, 1986. "Sample-Dependent Results Using Accounting and Market Data: Some Evidence," Journal of Finance, American Finance Association, vol. 41(4), pages 779-793, September.
    9. Raab, Martin & Schwager, Robert, 1993. "Spanning with Short-Selling Restrictions," Journal of Finance, American Finance Association, vol. 48(2), pages 791-793, June.
    10. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
    11. repec:bla:jfinan:v:44:y:1989:i:1:p:135-48 is not listed on IDEAS
    12. repec:bla:jfinan:v:44:y:1989:i:1:p:149-66 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Azzopardi, Paul & Silvio John, Camilleri, 2003. "The Relevance of Short Sales to the Maltese Stock Market," MPRA Paper 84566, University Library of Munich, Germany.
    2. Godfrey, Keith R.L., 2016. "Detecting the great short squeeze on Volkswagen," Pacific-Basin Finance Journal, Elsevier, vol. 40(PB), pages 323-334.
    3. Georgi Nalbantov & Rob Bauer & Ida Sprinkhuizen-Kuyper, 2006. "Equity style timing using support vector regressions," Applied Financial Economics, Taylor & Francis Journals, vol. 16(15), pages 1095-1111.
    4. Mohammad Sharik Essa & Evangelos Giouvris, 2020. "Oil Price, Oil Price Implied Volatility (OVX) and Illiquidity Premiums in the US: (A)symmetry and the Impact of Macroeconomic Factors," JRFM, MDPI, vol. 13(4), pages 1-40, April.
    5. Dungey, Mardi & McKenzie, Michael D. & Yalama, Abdullah, 2013. "The cross market effects of short sale restrictions," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 53-71.
    6. Asjeet Lamba & Mohamed Ariff, 2006. "Short selling restrictions and market completeness: the Malaysian experience," Applied Financial Economics, Taylor & Francis Journals, vol. 16(5), pages 385-393.
    7. Ben Chamberlain & Zhangxin (Frank) Liu & Lee A. Smales, 2023. "Short interest and the stock market relation with news sentiment from traditional and social media sources," Australian Economic Papers, Wiley Blackwell, vol. 62(2), pages 321-334, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2002. "Breadth of ownership and stock returns," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 171-205.
    2. Wang, Xue & Yan, Xuemin (Sterling) & Zheng, Lingling, 2020. "Shorting flows, public disclosure, and market efficiency," Journal of Financial Economics, Elsevier, vol. 135(1), pages 191-212.
    3. Min Bai, 2021. "Are firm characteristics priced differently between opposite short‐sales regimes?," International Finance, Wiley Blackwell, vol. 24(1), pages 95-118, April.
    4. Eero Pätäri & Timo Leivo, 2017. "A Closer Look At Value Premium: Literature Review And Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 79-168, February.
    5. Arati Kale & Devendra Kale & Sriram Villupuram, 2024. "Decomposition of risk for small size and low book-to-market stocks," Journal of Asset Management, Palgrave Macmillan, vol. 25(1), pages 96-112, February.
    6. Fernando Rubio, 2005. "Estrategias Cuantitativas De Valor Y Retornos Por Accion De Largo," Finance 0503029, University Library of Munich, Germany.
    7. Rui Li & Nan Li & Jiahui Li & Chongfeng Wu, 2018. "Short selling, margin buying and stock return in China market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(2), pages 477-501, June.
    8. Apergis, Nicholas & Payne, James E., 2014. "Resurrecting the size effect: Evidence from a panel nonlinear cointegration model for the G7 stock markets," Review of Financial Economics, Elsevier, vol. 23(1), pages 46-53.
    9. Autore, Don M. & Billingsley, Randall S. & Kovacs, Tunde, 2011. "The 2008 short sale ban: Liquidity, dispersion of opinion, and the cross-section of returns of US financial stocks," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2252-2266, September.
    10. Gabriel Hawawini & Donald B. Keim, "undated". "The Cross Section of Common Stock Returns: A Review of the Evidence and Some New Findings," Rodney L. White Center for Financial Research Working Papers 08-99, Wharton School Rodney L. White Center for Financial Research.
    11. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    12. Shyu, Yih-Wen & Chan, Kam C. & Liang, Hsin-Yu, 2018. "Spillovers of price efficiency and informed trading from short sales to margin purchases in absence of uptick rule," Pacific-Basin Finance Journal, Elsevier, vol. 50(C), pages 163-183.
    13. Jean-François L'Her & Jean-Marc Suret, 1995. "Heterogeneous Expectations, Short Sales Regulation and the Risk Return Relationship," CIRANO Working Papers 95s-29, CIRANO.
    14. Xia, Hui & Min, Xinyu & Deng, Shijie, 2015. "Effectiveness of earnings forecasts in efficient global portfolio construction," International Journal of Forecasting, Elsevier, vol. 31(2), pages 568-574.
    15. Asjeet Lamba & Mohamed Ariff, 2006. "Short selling restrictions and market completeness: the Malaysian experience," Applied Financial Economics, Taylor & Francis Journals, vol. 16(5), pages 385-393.
    16. Chris Brooks & Xiafei Li & Joelle Miffre, 2009. "Time Varying Volatility and the Cross-Section of Equity Returns Â," ICMA Centre Discussion Papers in Finance icma-dp2009-01, Henley Business School, University of Reading.
    17. Azzopardi, Paul & Silvio John, Camilleri, 2003. "The Relevance of Short Sales to the Maltese Stock Market," MPRA Paper 84566, University Library of Munich, Germany.
    18. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    19. Yukun Liu & Aleh Tsyvinski & Xi Wu, 2019. "Common Risk Factors in Cryptocurrency," NBER Working Papers 25882, National Bureau of Economic Research, Inc.
    20. Martin Wallmeier, 2000. "Determinanten erwarteter Renditen am deutschen Aktienmarkt — Eine empirische Untersuchung anhand ausgewählter Kennzahlen," Schmalenbach Journal of Business Research, Springer, vol. 52(1), pages 27-57, February.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:10:y:2000:i:1:p:105-116. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAFE20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.