Short interest and aggregate stock returns

David E. Rapach, Matthew Ringgenberg and Guofu Zhou

Journal of Financial Economics, 2016, vol. 121, issue 1, 46-65

Abstract: We show that short interest is arguably the strongest known predictor of aggregate stock returns. It outperforms a host of popular return predictors both in and out of sample, with annual R2 statistics of 12.89% and 13.24%, respectively. In addition, short interest can generate utility gains of over 300 basis points per annum for a mean-variance investor. A vector autoregression decomposition shows that the economic source of short interest’s predictive power stems predominantly from a cash flow channel. Overall, our evidence indicates that short sellers are informed traders who are able to anticipate future aggregate cash flows and associated market returns.

Keywords: Equity risk premium; Predictive regression; Short interest; Cash flow channel; Informed traders (search for similar items in EconPapers)
JEL-codes: C58 G12 G14 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (216)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:121:y:2016:i:1:p:46-65

DOI: 10.1016/j.jfineco.2016.03.004

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