Ekkehart Boehmer - Which shorts are informed
Today marks the third and final installment looking at academic research into short selling activity. Professor Ekkehart Boehmer is one of the leading academics in this field and his research is therefore integral to any team trying to get to grips with how to use short selling data to understand the markets. Two of his three papers are co-authored with Professor Charles Jones of Columbia University, who is another short selling sage.
“Which shorts are informed” is one of Boehmer’s oldest papers and was amongst the first to suggest that short selling is “an important contributor to efficient stock prices.” It uses US public data to show that heavily shorted stocks underperform less shorted ones by an annualized 15.6% over the following 20 trading days. He also shows that its is worth differentiating between the two types of short sellers – institutional versus retail –since the former is more informed. Click here to download the paper.
“What do Short Sellers Know” is an excellent piece of research (forthcoming in the Journal of Financial Economics 96) into that marriage made in heaven - short selling and US earnings downgrades. Boehmer proves that this type of trading is heaviest before negative surprises showing that short sellers are pretty good at predicting and making money from such events. Other work by Michael McKenzie somewhat disagrees, suggesting short sellers are more active after these announcements, based on fundamental information like sell side analysts. Click here to download the research paper or watch my brief interview discussing the findings here.
“The good news in short interest” is short and interesting. Professor Boehmer et al open their abstract with the wonderfully dismissive line, “stocks with relatively high short interest subsequently experience negative abnormal returns, but the effect can be transient and of debatable economic significance.” It is rare to see such a vague phrase from such a precise man! If you watch the video you will see what I mean. If this is the case, what is all the fuss about from regulators and politicians?
The surprising result is worth attention: an absence of short selling in heavily traded stocks tells you which ones are due to perform strongly. This ties in with results from a recent Deutsche Bank study using the Data Explorers data. And, in case you are worried there is cozy academic consensus on the effects of short selling, Boehmer ends the intro with this bombshell: “our results also cast doubt on existing theories of the impact of short sale constraints.” Click here to download the research paper or watch my brief interview here.
All three papers along with the full Data Explorers archive of research into short selling can be accessed at: www.dataexplorers.com/research
