Publication Type
Working Paper
Version
publishedVersion
Publication Date
11-2016
Abstract
A crowded trade emerges when speculators' positions are large relative to the asset's liquidity, making exit difficult. We study this problem of recent regulatory concern by focusing on short-selling. We show that days to cover (DTC), the ratio of short interest to trading volume, measures the costliness of exiting crowded trades. Crowding is an important concern as short-sellers avoid illiquid stocks, which we establish using an instrumental-variables strategy involving staggered stock market decimalization reforms. Arbitrageurs require a premium to enter into such trades as a strategy shorting high DTC stocks and buying low DTC stocks generates a 1.2% monthly return. A smaller days-to-cover effect also exists on the long positions of levered hedge funds.
Keywords
Days to Cover, Crowded Trades, Stock Returns
Discipline
Finance | Finance and Financial Management
Research Areas
Finance
First Page
1
Last Page
61
Identifier
10.2139/ssrn.2568768
Citation
HONG, Harrison G.; LI, Frank Weikai; NI, Sophie X.; SCHEINKMAN, Jose A.; and YAN, Philip.
Days to cover and stock returns. (2016). 1-61.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/5323
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.2139/ssrn.2568768