Biased Shorts: Short sellers’ Disposition Effect and Limits to Arbitrage

Massimo Massa and Bastian von Beschwitz
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Bastian von Beschwitz: https://www.federalreserve.gov/econres/bastian-von-beschwitz.htm

No 1147, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We investigate whether short sellers are subject to the disposition effect using a novel dataset that allows to identify the closing of short positions. Consistent with the disposition effect, short sellers are more likely to close a position the higher their capital gains. Furthermore, stocks with high short sale capital gains experience negative returns, suggesting that their disposition effect has an effect on stock prices. A trading strategy based on this finding achieves significant three-factor alphas. Overall, short sellers? behavioral biases limit their ability to arbitrage away the mispricing caused by the disposition effect of other market participants.

Keywords: Short selling; Disposition effect; Behavioral finance (search for similar items in EconPapers)
Pages: 53 pages
Date: 2015-11-03
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1147

DOI: 10.17016/IFDP.2015.1147

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