Short Interest and Aggregate Stock Returns
Saint Louis University - John Cook School of Business
Washington University in Saint Louis - Olin Business School
Washington University in St. Louis - Olin School of Business
October 15, 2015
Journal of Financial Economics (JFE), Forthcoming
Abstract:
We show that short interest is arguably the strongest known predictor of aggregate stock returns. It outperforms a host of popular return predictors both in and out of sample, with annual r-squared statistics of 12.89% and 13.24%, respectively. In addition, short interest can generate utility gains of over 300 basis points per annum for a mean-variance investor. A vector autoregression decomposition shows that the economic source of short interest’s predictive power stems predominantly from a cash flow channel. Overall, our evidence indicates that short sellers are informed traders who are able to anticipate future aggregate cash flows and associated market returns.
Number of Pages in PDF File: 51
Keywords: Equity risk premium; Predictive regression; Short interest; Asset allocation
JEL Classification: C58, G12, G14
