Shorting Skewness
Posted: 6 Sep 2009 Last revised: 16 May 2013
Date Written: September 3, 2009
Abstract
This paper shows that future risk-adjusted returns relate inversely with current short interest, current skewness, and the interaction between current short interest and current skewness. However, these relations vanish during the NASDAQ bubble, suggesting that synchronization risk (Abreu and Brunnermeier, 2002) or other bubble-related constraints may have disrupted “normal” pricing relations and short-sales activity. More traditional constraints also influence our findings, as the inverse relation between future risk-adjusted returns and current short interest and the interaction between current short interest and skewness is most pronounced for stocks that are most tightly constrained. This finding is consistent with Diamond and Verrecchia’s (1987) arguments that profits from shorting constrained stocks must be large enough to induce short sellers to correct the misinformation reflected in those stocks.
Keywords: Skewness, Short Sales, Bubble
JEL Classification: G10
Suggested Citation: Suggested Citation