GLOBAL MARKET SENTIMENTS AND MARKET RETURNS: A SHORT SALE PERSPECTIVE

Abstract

While numerous studies examine the informational content of short selling at an individual stock level, the implication of a high shorting activity on subsequent market returns is relatively unknown. In this study, I use a long panel of securities lending data for thirty countries from July 2006 to August 2010 to examine whether markets with high shorting activity subsequently underperform over the next five days, one month and six months. I show that while the impact of a high shorting activity is mixed in the very short horizon of five days, it is associated with an increasingly negative performance in the market over the next one to six months. This suggests that the bearish effect of a high short interest dominates any positive effects from short-covering. In the presence of regulatory constraints, I find that the negative impact of a high short interest is relatively muted on the five day and one month future market returns, implying that short selling constraints can delay but not prevent the price discovery process.