Monthly Long-Short Strategy Based on Stock Short Interest
Summary
The document describes a monthly, equal-weighted stock strategy that ranks NYSE, AMEX, and NASDAQ listings by short interest as a share of shares outstanding. It buys the lowest-short-interest decile and sells the highest-short-interest decile. The proposed signal reflects either overpricing under short-sale constraints or information held by short sellers, who may anticipate deteriorating fundamentals.
The cited research supports a link between high short interest and weaker subsequent returns, while other findings suggest low short interest may also identify positive-return stocks. The evidence is not uniform: one cited study reports a transient effect of debatable economic significance, and results can vary with weighting. The document does not provide complete implementation details such as trading costs, borrow availability, or treatment of corporate actions. It also says the strategy’s market correlation during crises is unknown, so its potential as a hedge requires further testing.
Key ideas
- Rank stocks monthly by short interest relative to shares outstanding.
- Go long the lowest-short-interest decile and short the highest-short-interest decile with equal weights.
- Short interest may predict returns because short sellers possess information about future fundamentals.
- Short-sale constraints may also allow overvaluation to persist when pessimistic investors cannot borrow shares.
- Published findings differ on the strength and economic significance of the effect.
- The strategy’s crisis-period correlation and hedging value are not established.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.