Keywords

short-selling profitability, return persistence, profitable short positions

Abstract

I examine the persistence in stock level short-selling profitability by using contract level shorting data. I do find that short-sellers are profitable on average using an approach that takes into account the exact timing of the opening and closing of short positions. But I also find that this profitability is driven by the set of stocks for which short-sellers previously had strongly profitable outcomes. I find that if short-selling contracts for a given stock are profitable in the last six months that on average short sellers continue to make profitable trades in that stock in the future. For stocks with the 30% highest short-selling profitability in the last 6 months, raw short-selling profitability for those same stocks in the following month is a statistically significant 2.49% (3.51% on a risk adjusted basis). Furthermore, when short sellers initiate new short positions among the set stocks that short sellers experienced strongly successful trades from 18 months to 12 month ago, these short sellers experience a significant one 1% higher average return than for stocks that weren’t in that group.

Original Publication Citation

The Narrowness of Shorting Profitability, 2019.