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Business Cycle Variation in Short Selling Strategies: Picking During Expansions and Timing During Recessions

Journal of financial and quantitative analysis, 2022-12, Vol.57 (8), p.3018-3047 [Peer Reviewed Journal]

Copyright Cambridge University Press Dec 2022 ;ISSN: 0022-1090 ;EISSN: 1756-6916 ;DOI: 10.1017/S0022109022000540

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  • Title:
    Business Cycle Variation in Short Selling Strategies: Picking During Expansions and Timing During Recessions
  • Author: Dixon, Peter N. ; Kelley, Eric K.
  • Subjects: Business cycles ; Earnings ; Endogenous ; Expansion ; Portfolio management ; Recessions ; Return on assets ; Securities markets ; Short sales ; Timing
  • Is Part Of: Journal of financial and quantitative analysis, 2022-12, Vol.57 (8), p.3018-3047
  • Description: Abstract We present evidence that short sellers alternate between stock picking during expansions and market timing during recessions. First, firm-level short interest is a much stronger negative predictor of the cross-section of stock returns during expansions than it is during recessions. High short interest also only predicts negative future earnings announcement returns during expansions. We attribute these findings to short sellers’ emphasis on collecting firm-specific signals. Second, short sellers appear to make factor bets more so during recessions than during expansions. These bets tend to pay off as we observe a strong negative relation between the betas of highly shorted stocks and future stock market returns, a result that disappears during expansions. Together, these findings are consistent with theories of information acquisition under attention constraints, endogenous information production, as well as theories of time variation in aggregate overconfidence amongst traders.
  • Publisher: Seattle: Cambridge University Press
  • Language: English
  • Identifier: ISSN: 0022-1090
    EISSN: 1756-6916
    DOI: 10.1017/S0022109022000540
  • Source: AUTh Library subscriptions: ProQuest Central
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