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Out of Sync: Dispersed Short Selling and the Correction of Mispricing

Antonio Gargano, Juan Sotes-Paladino and Patrick Verwijmeren
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Antonio Gargano: C.T. Bauer College of Business/University of Melbourne
Juan Sotes-Paladino: Universidad de los Andes/University of Melbourne
Patrick Verwijmeren: Erasmus School of Economics/University of Melbourne

No 108, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

Abstract: How synchronized are short sellers? We examine a unique dataset on the distribution of profits across a stock’s short sellers and find evidence of substantial dispersion in the initiation of their positions. Consistent with this dispersion reflecting “synchronization risk,” i.e., uncertainty among short sellers about when others will short sell (Abreu and Brunnermeier, 2002, 2003), more dispersed short selling signals (i) greater stock overpricing; and (ii) longer delays in overpricing correction. These effects are prevalent even among stocks facing low short-selling costs or other explicit constraints. Overall, our findings provide novel cross-sectional evidence of synchronization problems among short sellers and their pricing implications.

Keywords: Short Selling; Limits to Arbitrage; Synchronization Risk (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2022-01
New Economics Papers: this item is included in nep-fmk
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