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Short Covering Trades

Published online by Cambridge University Press:  28 March 2018

Ekkehart Boehmer ,
Truong X. Duong  and
Zsuzsa R. Huszár
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Abstract

Short sellers are known to have private information about security prices. Empirical evidence of short selling, however, is based on only half of short sellers’ trading activity; specifically, the opening of the position. Using disclosed large-short-position data from the Japanese stock market, we provide the first detailed evidence of covering trades and find a positive reaction to short covering that only partially reverses. Although these results are consistent with substantial transaction costs for closing large short positions, they also reveal that some short sellers are privately informed about positive future events and have timing ability in covering positions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 2 , April 2018 , pp. 723 - 748
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

Huszár is also affiliated with the Risk Management Institute (RMI) at NUS and the Institute of Real Estate Studies (IRES) at NUS. We thank Yakov Amihud, Tarun Chordia, Jennifer Conrad (the editor), Allaudeen Hameed, Pedro Saffi, Takeshi Yamada, Weina Zhang, and especially an anonymous referee for their helpful comments. Huszár acknowledges the generous financial support from a NUS startup grant (R-315-000-087-133) and an academic research grant (R-315-000-085-112). The authors also thank IHS Markit Securities (formerly Data Explorer) for providing the data and relevant information.

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