High short interest effect and aggregate volatility risk

Alexander Barinov and Wu, Juan (Julie)

Journal of Financial Markets, 2014, vol. 21, issue C, 98-122

Abstract: We propose a risk-based firm-type explanation on why stocks of firms with high relative short interest (RSI) have lower future returns. We argue that these firms have negative alphas because they are a hedge against expected aggregate volatility risk. Consistent with this argument, we show that these firms have high firm-specific uncertainty and option-like equity, and the aggregate volatility risk factor can largely explain the high RSI effect. The key mechanism is that high RSI firms have abundant growth options and, all else equal, growth options become less sensitive to the underlying asset value and more valuable as idiosyncratic volatility goes up. Idiosyncratic volatility usually increases with aggregate volatility (i.e., in recessions).

Keywords: Aggregate volatility risk; Short interest; Uncertainty; Mispricing (search for similar items in EconPapers)
JEL-codes: E44 G12 G13 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:21:y:2014:i:c:p:98-122

DOI: 10.1016/j.finmar.2014.10.001

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