AFBC-Days to Cover and Stock Returns

Weikai Li    Harrison Hong, Frank Weikai Li, Sophie Ni, Jose Scheinkman, Philip Yan
10 Nov 2016
Categories: Fundamental Analysis, Investment Management, Alternative Assets, Equity Investments, Behavioral Finance

Country or region: Asia Pacific (Overall)

Summary:
Days to cover, short interest ratio divided by average daily share turnover, and not short interest ratio measures the rewards to entering crowded trades.


Reference URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2568768


Download Article



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.




Statistics
Total Views: 648
Total Downloads: 3

Share Article

Reader Comments

No comments made on this post yet

Note

If you have any copyright and other associated infringements related to this item, please click on the Terms and Conditions link where you will be directed to the Digital Millennium Copyright Act (DCMA) that will outline the procedure for raising your concern.

If you have any concerns with the content of the item [e.g., offensive language and/or material, inappropriate material] then please proceed to utilize the Contact Us form. Remember that when using the Contact Us form, please ensure you reference/cite clearly the item in question (e.g., name of article, author(s) of article) and the nature of the complaint.

Categories