Biased short: Short sellers' disposition effect and limits to arbitrage

Bastian von Beschwitz and Massimo Massa

Journal of Financial Markets, 2020, vol. 49, issue C

Abstract: We investigate whether short sellers are subject to the disposition effect. Consistent with the disposition effect, short sellers are less likely to close a position after experiencing capital losses. This tendency is associated with lower profitability, suggesting a behavioral bias. Furthermore, this tendency is weaker when short sells are likely part of a long-short strategy. In addition, the closing pattern of short sellers exhibits a hump shape relative to capital gains, the opposite of what has been established for individual long-only investors. Overall, short sellers' behavioral biases limit their ability to arbitrage away mispricing caused by other traders' disposition effect.

Keywords: Disposition effect; Behavioral finance; Short selling (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:49:y:2020:i:c:s1386418118302453

DOI: 10.1016/j.finmar.2019.100512

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