Do arbitrageurs amplify economic shocks?

Harrison Hong, Jeffrey D. Kubik and Tal Fishman

Journal of Financial Economics, 2012, vol. 103, issue 3, 454-470

Abstract: We test the hypothesis that arbitrageurs amplify economic shocks in equity markets. The ability of speculators to hold short positions depends on asset values. Shorts are often reduced following good news about a stock. Therefore, the prices of highly shorted stocks are excessively sensitive to shocks compared with stocks with little short interest. We confirm this hypothesis using several empirical strategies including two quasi-experiments. In particular, we establish that the price of highly shorted stocks overshoots after good earnings news due to short covering compared with other stocks.

Keywords: Shorting; Short covering; Leverage; Destabilizing arbitrage (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (34)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:103:y:2012:i:3:p:454-470

DOI: 10.1016/j.jfineco.2011.10.007

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