Common Short Selling and Excess Comovement: Evidence from a Sample of LSE Stocks

Marco Valerio Geraci, Jean-Yves Gnabo and David Veredas

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: For the period 2013–2019, and a sample of 356 LSE stocks, we find that common short sold capital is positively and significantly associated with future four-factor residual return correlation, controlling for many pair characteristics, including similarities in size, book-to-market, and momentum. The relationship disappears for illiquid stock pairs, whereas it strengthens when short positions originate from informed agents, such as hedge funds, active investors, and short sellers with high past performance. This supports the hypothesis that the relationship is driven by information, rather than by price pressure. We show that these results can be used to obtain diversification benefits.

Keywords: comovement; hedge funds; short selling (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2020-07-05
New Economics Papers: this item is included in nep-fmk
Note: mvg23
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Journal Article: Common short selling and excess comovement: Evidence from a sample of LSE stocks (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2066

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