Short covering trades

• Main Authors: BOEHMER, Ekkehart, DUONG, Truong X., HUSZAR, Zsuzsa R.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2018
• Subjects: Short Selling; Short Covering; Informed Trading; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/5877; https://ink.library.smu.edu.sg/context/lkcsb_research/article/6876/viewcontent/ShortCoveringTrades_2016_afv.pdf
• Institution: Singapore Management University

Short sellers are known to have private information about security prices. Empirical evidence of short selling, however, is based on only half of short sellers’ trading activity; specifically, the opening of the position. Using disclosed large short position data from the Japanese stock market, we provide the first detailed evidence of covering trades and find a positive reaction to short covering that only partially reverses. While these results are consistent with substantial transaction costs for closing large short positions, they also reveal that some short sellers are privately informed about positive future events and have timing ability in covering positions.