Working Paper: NBER ID: w10218
Authors: Owen A. Lamont; Jeremy C. Stein
Abstract: We examine some basic data on the evolution of aggregate short interest, both during the dot-com era, and at other times in history. Total short interest moves in a countercyclical fashion. For example, short interest in NASDAQ stocks actually declines as the NASDAQ index approaches its peak. Moreover, this decline does not seem to reflect a substitution away from outright short-selling and towards put options, as the ratio of put-to-call volume displays the same countercyclical tendency. The evidence suggests that: i) arbitrageurs are reluctant to bet against aggregate mispricings; and ii) short-selling does not play a particularly helpful role in stabilizing the overall stock market.
Keywords: No keywords provided
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| total short interest declines (G40) | Nasdaq index approaches its peak (E32) |
| Nasdaq index approaches its peak (E32) | short sellers are reluctant to engage (G40) |
| short interest declines does not reflect a shift towards put options (G40) | put-call ratio displays similar countercyclical tendencies (E32) |
| short selling does not stabilize the market (G10) | low levels of short interest during bull markets (G14) |