Momentum and reversal: The role of short selling

Zhaobo Zhu, Xinrui Duan, Licheng Sun and Jun Tu

Journal of Economic Dynamics and Control, 2019, vol. 104, issue C, 95-110

Abstract: This paper investigates the relation between short selling and momentum. We document that a consistent momentum strategy that buys lightly shorted winners and sells heavily shorted losers exhibits strong short-term momentum and no long-term reversal. In contrast, an inconsistent momentum strategy that buys heavily shorted winners and sells lightly shorted losers experiences weak short-term momentum and persistent long-term reversal. Our results are robust after controlling for firm characteristics, proxy for short-sale constraints, and investor sentiment, as well as an exogenous shock (the Taxpayer Relief Act of 1997). These findings present a new challenge to existing theories of momentum that rely solely on investor underreaction and overreaction.

Keywords: Momentum; Reversal; Short selling; Short-sale constraints (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2019
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:dyncon:v:104:y:2019:i:c:p:95-110

DOI: 10.1016/j.jedc.2019.05.001

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