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Short Kiss of Death?

| | Posted in: Short Selling

In his January 2005 paper on “Constrained Short Selling and the Probability of Informed Trade”, Tyler Henry explores the relationship between private information and the returns on stocks with high short interest. He finds that:

  • Confirming prior research, equal-weighted portfolios of high short interest stocks tend to underperform. Much of this underperformance disappears for value-weighted portfolios. Negative abnormal returns do not increase with the level of short interest on a value-weighted basis.
  • High short interest stocks with the most informed trading underperform by about 1% per month.
  • Except for small firms, high short interest stocks with the least informed trading do not underperform.

In summary, underperformance of high short interest stocks may be limited to those with high levels of informed (non-arbitrage, non-noise) trading.

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