Short Interest, Macroeconomic Variables and Aggregate Stock Returns

Abstract

Rapach, Ringgenberg and Zhou (2016) claim that for the sample period 1973 to 2014 "short interest is arguably the strongest known predictor of aggregate stock returns", that it "outperforms a host of popular predictors", and that it represents "informed traders who are able to anticipate changes in future aggregate cashflows". We show that the entire evidence regarding these claims disappears if we exclude data on short interest for the calendar year of 2008 when the financial crisis had its largest impact on stock markets. In contrast, we show that macroeconomic variables can predict aggregate returns and combining forecasts based on macroeconomic variables provides consistent and stable forecasts in periods that include and exclude the financial crisis.

Keywords: predictability, short interest, macroeconomic variables, financial crisis

JEL Classification: G1, G11, G12