Google Play icon

Why investors should listen to short sellers (yes, short sellers)​​

Share
Posted May 5, 2015

Short sellers often get a bad rap for taking the “sell high, buy low” investment approach to an extreme, at times to the detriment of companies and other investors. Their “speed dating” version of buying and selling stocks can be viewed as impacting the market negatively, but new research from the Olin Business School at Washington University in St. Louis shows that they may actually have more insight than some might think.

In the study, “Short Interest and Aggregate Stock Returns,” authors Matthew Ringgenberg, PhD, assistant professor of finance at Olin; Guofu Zhou, PhD, professor of finance at Olin; and David Rapach, PhD, of Saint Louis University, conclude that short interest is arguably the strongest known predictor of aggregate stock returns. Their findings indicate that not only does short interest outperform a number of popular return predictors, but it also can generate utility gains of over 300 basis points per year for a typical investor.

“Our evidence shows that short sellers are informed traders,” Ringgenberg said. “They usually do their homework before they trade. Not only do they make money on their own investments, but they also can help other investors by predicting future overall market movements through their informed anticipation of future aggregate cash flows.”

The researchers studied the total amount of short selling in U.S. stocks between 1973-2013, filtering the data against trends to account for the increasing rate of short selling that the market experienced across the decades. The study resulted in the creation of an index that provides a valuable window into future market excess returns.

“Our index shows that short selling is one of, if not the most powerful, market return predictors,” Ringgenberg said. “It is more important than many had previously thought. Our findings provide the first evidence that short sellers are skilled not only at understanding the fundamentals of a firm and paying attention to what media are saying about it, but they also are very good at processing information about macroeconomic conditions.

“There is much to be learned by paying attention to the movements of short sellers,” Ringgenberg said.

Source: Washington University in St. Louis

Featured news from related categories:

Technology Org App
Google Play icon
84,820 science & technology articles

Most Popular Articles

  1. New Class of Painkillers Offers all the Benefits of Opioids, Minus the Side Effects and Addictiveness (2 days old)
  2. Top NASA Manager Says the 2024 Moon Landing by Astronauts might not Happen (September 19, 2019)
  3. How social media altered the good parenting ideal (September 4, 2019)
  4. What's the difference between offensive and defensive hand grenades? (September 26, 2019)
  5. Just How Feasible is a Warp Drive? (September 25, 2019)

Follow us

Facebook   Twitter   Pinterest   Tumblr   RSS   Newsletter via Email