Shorting Skewness

Posted: 6 Sep 2009 Last revised: 16 May 2013

See all articles by Benjamin M. Blau

Benjamin M. Blau

Utah State University - Huntsman School of Business

J. Michael Pinegar

Brigham Young University - Marriott School of Management

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

Blau, Benjamin M. and Pinegar, J. Michael, Shorting Skewness (September 3, 2009). Available at SSRN: https://ssrn.com/abstract=1468047 or http://dx.doi.org/10.2139/ssrn.1468047

Benjamin M. Blau (Contact Author)

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322
United States

J. Michael Pinegar

Brigham Young University - Marriott School of Management ( email )

Provo, UT 84602
United States
801-422-3088 (Phone)
801-422-0108 (Fax)

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