Hostname: page-component-78c5997874-8bhkd Total loading time: 0 Render date: 2024-11-05T09:28:32.275Z Has data issue: false hasContentIssue false

Short Interest: Explanations and Tests

Published online by Cambridge University Press:  06 April 2009

Abstract

Cross-sectional and time series tests are performed to explain levels and changes in short interest. Explanatory variables and tests are chosen based on tax, arbitrage, and speculative reasons for going short. Short interest is found to follow a seasonal pattern that is weakly consistent with tax-based trading. Stocks with high betas and the existence of convertible securities or options tend to have higher levels of short interest, which is consistent with arbitrage efforts. For firms with traded options, there is a positive association between the month-to-month changes in option open interest and short interest. Prior months' returns and changes in short interest are positively related, but there is no relationship between changes in short interest and returns in the subsequent month.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 1990

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Amemiya, A.Advanced Econometrics, Harvard Univ. Press (1985).Google Scholar
Auster, R.Tax Consequences of Short Selling.” Financial Planning Today, 2 (07 1978), 185193.Google Scholar
Ball, R., and Brown, R.. “An Empirical Evaluation of Accounting Income Numbers.” Journal of Accounting Research, 6 (Autumn 1968), 159178.CrossRefGoogle Scholar
Banz, R.The Relationship between Return and Market Value of Common Stocks.” Journal of Financial Economics, 9 (03 1981), 318.CrossRefGoogle Scholar
Beaver, W.; Clarke, R.; and Wright, W.. “The Association between Unsystematic Security Returns and the Magnitude of Earnings Forecast Errors.” Journal of Accounting Research, 17 (Autumn 1979), 316340.CrossRefGoogle Scholar
Brito, N.Portfolio Selection in An Economy with Marketability and Short Sales Restrictions.” Journal of Finance, 33 (05 1978), 589601.CrossRefGoogle Scholar
Constantinides, G.Optimal Stock Trading with Personal Taxes: Implications for Prices and the Abnormal January Returns.” Journal of Financial Economics, 13 (03 1984), 6589.CrossRefGoogle Scholar
Diamond, D., and Verrecchia, R.. “Constraints on Short-Selling and Asset Price Adjustment to Private Information.” Journal of Financial Economics, 18 (06 1987), 277312.CrossRefGoogle Scholar
Dybvig, P.Short Sales Restrictions and Kinds on the Mean Variance Frontier.” Journal of Finance, 39 (03 1984), 239244.CrossRefGoogle Scholar
Dyl, E.Short Selling and the Capital Gains Tax.” Financial Analysts Journal, 34 (0304 1978), 6164.CrossRefGoogle Scholar
Elton, E.; Gruber, M.; and Padberg, M.. “Simple Rules for Optimal Portfolio Selection: The Multi Group Case.” Journal of Financial and Quantitative Analysis, 12 (09 1977), 329345.CrossRefGoogle Scholar
Figlewski, S.The Informational Effects of Restrictions on Short Sales: Some Empirical Evidence.” Journal of Financial and Quantitative Analysis, 16 (11 1981), 463476.CrossRefGoogle Scholar
Hanna, M.A Stock Price Predictive Model Based on Changes in Ratios of Short Interest to Trading Volume.” Journal of Financial and Quantitative Analysis, 11 (12 1976), 857872.CrossRefGoogle Scholar
Hurtado-Sanchez, L.Short Interest: Its Influence as a Stabilizer of Stock Returns.” Journal of Financial and Quantitative Analysis, 13 (12 1978), 965985.CrossRefGoogle Scholar
Jarrow, R.Heterogeneous Expectations, Restrictions on Short Sales, and Equilibrium Asset Prices.” Journal of Finance, 35 (12 1980), 11051114.CrossRefGoogle Scholar
Keim, D.Size-Related Anomalies and Stock Return Seasonality: Further Empirical Evidence.” Journal of Financial Economics, 12 (06 1983), 1332.CrossRefGoogle Scholar
Kerrigan, T.The Short Interest Ratio and Its Component Parts.” Financial Analysts Journal, 30 (1112 1974), 4549.CrossRefGoogle Scholar
McDonald, J., and Baron, D.. “Risk and Return on Short Positions in Common Stock.” Journal of Finance, 28 (03 1973), 97107.CrossRefGoogle Scholar
Miller, E.Risk, Uncertainty and Divergence of Opinion.” Journal of Finance, 32 (09 1977), 11511168.CrossRefGoogle Scholar
Ross, S.The Capital Asset Pricing Model (CAPM), Short-Sale Restrictions and Related Issues.” Journal of Finance, 32 (03 1977), 177183.Google Scholar
Seneca, J.Short Interest: Bearish or Bullish?Journal of Finance, 22 (03 1967), 6770.Google Scholar
Stephan, J. “Information Content of Security Prices: Evidence on the Rational Expectations Hypothesis.” Doctoral Diss., Cornell Univ. (1985).Google Scholar
Thaler, R., and DeBondt, W.. “Does the Stock Market Overreact?Journal of Finance, 40 (07 1985), 793805.Google Scholar