Do Arbitrageurs Amplify Economic Shocks?

摘要

We examine whether arbitrageurs amplify fundamental shocks in the context of short arbitrage in equity markets. The ability of arbitrageurs to hold on to short positions depends on asset values: shorts are often reduced following good news about a stock. As a result, the prices of highly shorted stocks are excessively sensitive to economic shocks. Using monthly short interest data and exploiting differences in short selling regulations across stock exchanges to instrument for the amount of shorting in a stock, we find the following. (1) The price of a highly shorted stock is more sensitive to earnings news than a stock with little short interest. (2) Short interest changes around announcements (proxied by share turnover) are more sensitive to earnings surprises for highly shorted stocks. (3) For highly shorted stocks, returns to shorting are higher following better earnings news. (4) These differential sensitivities are driven by very good earnings news as opposed to very bad earnings news. These findings point to the importance of limited arbitrage in affecting asset price dynamics and the potentially destabilizing role of speculators.