Publication Type

Journal Article

Version

acceptedVersion

Publication Date

7-2019

Abstract

This paper investigates the relation between short selling and momentum. We document that a consistent momentum strategy that buys lightly shorted winners and sells heavily shorted losers exhibits strong short-term momentum and no long-term reversal. In contrast, an inconsistent momentum strategy that buys heavily shorted winners and sells lightly shorted losers experiences weak short-term momentum and persistent long-term reversal. Our results are robust after controlling for firm characteristics, proxy for short-sale constraints, and investor sentiment, as well as an exogenous shock (the Taxpayer Relief Act of 1997). These findings present a new challenge to existing theories of momentum that rely solely on investor underreaction and overreaction.

Keywords

Momentum, Reversal, Short selling, Short-sale constraints

Discipline

Corporate Finance | Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Journal of Economic Dynamics and Control

Volume

104

First Page

95

Last Page

110

ISSN

0165-1889

Publisher

Elsevier: 24 months

Embargo Period

3-24-2021

Additional URL

https://doi.org/10.1016/j.jedc.2019.05.001

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