Surprise in Short Interest as Stock Return Predictor

Do surprising fluctuations in short interest ratios of stocks indicate new information from short sellers that predicts returns of these stocks? In their November 2020 paper entitled “Surprise in Short Interest”, Matthias Hanauer, Pavel Lesnevski and Esad Smajlbegovic examine standardized unexpected short interest ratio as a stock return predictor. They define this variable as current short interest ratio minus 12-month simple moving average of monthly short interest ratios divided by standard deviation of short interest ratios over the past 12 months, calculated monthly for each stock. Using stock short interest data, associated stock returns and firm accounting data for U.S. publicly listed common stocks, excluding those priced less than $5 or in the bottom 5% of NYSE market capitalizations, as available during March 1980 through December 2013, they find that: (more…)