Supply and Demand Shifts in the Shorting Market

Lauren Cohen, Karl B. Diether and Christopher Malloy ()
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Lauren Cohen: U of Chicago
Karl B. Diether: Ohio State U

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Using proprietary data on stock loan fees and stock loan quantities from a large institutional investor, we clarify the nature of the correlation between shorting indicators and stock prices. Employing a unique identification strategy, we are able to isolate shifts in the supply and demand for shorting. We find that shorting demand is an important predictor of future stock returns. The magnitude of this effect is large: an increase in shorting demand leads to a significant negative average abnormal return of 2.52% in the following month. We also provide evidence of a causal link between shorting demand and future stock returns by showing that these results are unlikely to be driven by public information flow.

Date: 2005-02
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Related works:
Journal Article: Supply and Demand Shifts in the Shorting Market (2007)
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