This paper provides the first empirical evidence of the scale, the determinants, and the information content of short selling activities in exchange-traded funds (ETFs). Short sellers use ETFs as an avenue to circumvent short-sale constraints at the stock level, and the shorting activity on ETFs rises with the difficulty of shorting the underlying stocks. ETF shorting activities are informative of the future returns of underlying stocks: stocks that are heavily shorted via their holding ETFs underperform those lightly shorted by 94 basis points per month. The return predictability of ETF short selling on individual stocks is distinct from stock-level shorting measures, and is concentrated among stocks that face the most severe arbitrage constraints. Our evidence suggests that ETFs contribute to a more informationally efficient market by allowing arbitrageurs to target overpriced stocks that are otherwise difficult to short.
ETFs, Short Selling, Equity Lending, Limits to Arbitrage, Market Efficiency
Finance | Finance and Financial Management
LI, Frank Weikai and ZHU, Qifei.
Shorting selling ETFs. (2017). 1-71. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/5315
Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.