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Short selling in extreme events

Marco Valerio Geraci (), Tomas Garbaravičius and David Veredas

Journal of Financial Stability, 2018, vol. 39, issue C, 90-103

Abstract: We study the association between daily changes in short selling activity and financial stock prices during extreme events using TailCoR, a measure of tail correlation. For the largest European and US banks, as well as European insurers, we uncover a strong relation during exceptional (extreme) days and a weak relation during normal (average) days. Examining days with large increases in short positions and large downfalls in stock prices, we find evidence of both momentum and contrarian short selling taking place. For North American bank stocks, contrarian short selling appears more practiced than for European bank and insurance stocks. We find that the uncovered relationship decreases with firm size and increases during ban periods, which is in line with short selling becoming more informative when constrained.

Keywords: Short selling; Tail correlation (search for similar items in EconPapers)
JEL-codes: G15 G18 G28 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:39:y:2018:i:c:p:90-103

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