Do short sellers amplify extreme market declines?

Sandun Fernando, Olena Onishchenko and Duminda Kuruppuarachchi

Pacific-Basin Finance Journal, 2024, vol. 87, issue C

Abstract: When the market falls sharply, short sellers are criticized for intensifying price declines by manipulative trading that pushes prices below fundamental values. Contrary to this view, we find that increases in institutional and retail short seller's trading on the days of marketwide declines are associated with overpriced stocks. Their trading is economically profitable: a portfolio that buys the least shorted and sells short the most shorted stocks by institutional (retail) investors earns 0.90% (0.79%) risk-adjusted weekly returns. Overall, institutional and retail short sellers adopt valuation-based trading during market-wide declines.

Keywords: Retail short sellers; Institutional short sellers; Marketwide declines; Overpricing (search for similar items in EconPapers)
JEL-codes: D53 G12 G14 G20 G23 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:87:y:2024:i:c:s0927538x24002506

DOI: 10.1016/j.pacfin.2024.102498

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