DP16319 Best Short

Author(s): Pasquale Della Corte, Robert Kosowski, Nikolaos Rapanos
Publication Date: July 2021
Keyword(s): Anomalies, Disclosure, Hedge Funds, Regulation, Short-sale performance
JEL(s): G14, G15, G23
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16319

We infer investors' expectations about future stock returns through a measure of short conviction that exploits net short positions disclosed at the investor-stock level for European stock markets. A strategy that sells high-conviction stocks and buys low-conviction stocks, named Best Short, generates a risk-adjusted excess return that is larger than 8% per annum and differs from the performance of traditional strategies based on aggregate short interest. Its profitability, moreover, cannot be explained by transaction costs, stock characteristics, frictions in the securities lending market, leverage constraints, and measures of price inefficiency.