Short Stock Research Articles

EmTract: Extracting emotions from social media

We developed EmTract, an open-source tool designed to extract investor emotions from financial social media data. We contribute a novel dataset of 10,000 financial social media messages annotated with emotion labels and improve the DistilBERT model by incorporating 4861 tokens, including emojis and emoticons. This augmentation improved the model’s accuracy by over 3 percentage points compared to the standard BERT model, while providing faster inference and reduced computational requirements. Our models and datasets are publicly available to promote broader adoption and further research in financial sentiment analysis. We validated EmTract during the 2021 “meme stock” rally, where it accurately captured spikes in emotions such as anger and disgust following trading restrictions, demonstrating the model’s practical applicability in real-world events. Additionally, heterogeneity tests show that emotions have a stronger impact on smaller, more volatile, and heavily shorted stocks, aligning with established behavioral finance theories. These findings underscore the importance of integrating emotional dynamics into market analysis, particularly for speculative assets. Our contributions represent a significant step forward in understanding the psychological drivers of financial markets and offer practical tools for future research and industry applications.

Do short sellers amplify extreme market declines?

When the market falls sharply, short sellers are criticized for intensifying price declines by manipulative trading that pushes prices below fundamental values. Contrary to this view, we find that increases in institutional and retail short seller's trading on the days of marketwide declines are associated with overpriced stocks. Their trading is economically profitable: a portfolio that buys the least shorted and sells short the most shorted stocks by institutional (retail) investors earns 0.90% (0.79%) risk-adjusted weekly returns. Overall, institutional and retail short sellers adopt valuation-based trading during market-wide declines.

Information shocks and short-term market overreaction: The role of investor attention

Employing jumps in stock return as a proxy for information shocks, we empirically discover the short-term overaction in the Chinese stock market. Trading strategies short (long) stocks with the largest (smallest) lagged cumulative jump returns earn sizable positive returns. Besides, the information shocks exhibit significant predictive ability for future returns. The market overreaction is robust to firm characteristics, subperiod analysis, and intraday analysis. Investor attention facilitates this short-term market overreaction.

Principles and Economic Consequences Analysis of Short-Selling Mechanisms for Listed Companies from the Perspective of Information Disclosure: A Case Study of Luckin Coffee

This paper, using Luckin Coffee as a practical case study, explores the principles and economic consequences of short-selling mechanisms for listed companies from the perspective of information disclosure. Short selling represents investors predicting a downward trend in stock prices, borrowing stocks before selling them when prices fall, and profiting from the price difference. The short-selling mechanism diversifies the entire market and serves as a self-cleansing process in the trading market. It efficiently exposes illegal activities and regulatory violations of listed companies to heightened market scrutiny through various means, effectively curbing such misconduct. It also allows investors to express pessimism about specific markets and stocks while profiting from it. However, the short-selling mechanism also introduces potential issues. In a market like China, which has a relatively short stock market history, incomplete legal systems, imperfect regulations, and information asymmetry, excessive short-selling pressure can lead to speculation, market volatility, excessive stock price declines, and impacts on corporate valuations. Therefore, the short-selling mechanism is a double-edged sword for listed companies, beneficial for market development, but also posing various potential threats. Adequate information disclosure is indispensable for market supervision to ensure positive market growth and stability.

Information intensity and pricing of systematic earnings announcement risk

AbstractEarnings announcement (EA) poses a non‐diversifiable risk to investors. This study examines whether investors demand higher returns for stocks with high systematic EA risk. We find evidence that systematic EA risk is priced, however, the premium is realized only during periods with intensified cash‐flow news. Specifically, we construct an ex‐ante measure of expected information intensity (EII) and find that in the subsample of high‐EII firms, those with high systematic EA risk earn significantly higher future returns. Controlling for known risk factors, stocks with high systematic EA risk outperform those with low systematic EA risk by 0.43% in monthly Fama–French five‐factor alpha. We also confirm the well‐documented announcement premium, i.e., high‐EII firms outperform low‐EII firms and show that the EA risk premium is distinct from the announcement premium. To exploit both premiums, a feasible strategy of long stocks with both high‐EII and high systematic EA risk and short stocks with low‐EII yields monthly 0.81% five‐factor alpha.

How price limit affects the market efficiency in a short-sale constrained market? Evidence from a quasi-natural experiment

In this paper, we examine the joint effect of price limit and short-sale constraints on price discovery. Using a natural experiment in China, we show the exogenous relaxation of price limit improves price efficiency. Importantly, shortable stocks experience more improvement in price efficiency than non-shortable stocks. Event-study analysis further documents less delayed price discovery following the price-limit-hitting event on shortable stocks, which is explained by selling pressure from large institutional orders. Our findings suggest that alleviating shortsale constraints could synergize with the relaxation of trading restrictions to improve price efficiency.

Primulamedogensis, a new species of Primulaceae from Tibet of China.

We present a description of a newly discovered species, Primulamedogensis, found in southern Xizang, China. Additionally, we explore distinctive morphological characteristics that aid in its taxonomy. The new species belongs to sect. Cordifoliae and exhibits morphological similarities to P.baileyana and P.rotundifolia. However, it can be distinguished by its densely grayish-haired roots, petioles that are 3-7 times longer than the leaf blades, a short stock surrounded by straight and withered petioles, reniform leaf blades with revolute margins, scapes shorter than or equal to leave and both at flowering and in fruiting, flowers solitary on the scapes.

Dual role of the country factors in international asset pricing: The local factors and proxies for the global factors

Considering that the popular Fama–French–Carhart (FFC) factors are actually long–short stock portfolios, we (i) test if the FFC six country factors are globalized, (ii) compare the pricing performance of the global, country, and local (orthogonalized) factors, and (iii) examine the pricing implications of the globalized country factors. We find: Most country factors are significantly globalized as measured by R2 from regressing the country factors on the global factors. The R2, however, varies greatly across countries and factor types, ranging from 0.03 for the Hong Kong value factor to 0.88 for the U.S. market factor during 1990–2017. In terms of asset pricing, the country factors perform the best and the local factors the worst. The well-known outperformance of the country factors over the global factors in pricing arises from the “dual role” the country factors play in partially integrated markets, i.e., the country-specific local factors and proxies for the global factors.

Playing Robinhood: Jamming Wall Street with Dumb Money in the Great Short Squeeze

ABSTRACT This essay analyzes the rhetorics of social and economic protest surrounding the 2021 short squeeze where swarms of gamers-made-investors used the popular trading app Robinhood to create artificial demands for shorted stocks such as GameStop and AMC. Fueled by populist rhetoric on subreddit forum, r/WallStreetBets, the movement created a short-lived bubble that cost hedge funds billions. I argue that investors were subjectivized by market-based agencies through anger and nostalgia during a COVID-19 period when many were feeling powerless. Through market jamming, investors temporarily used the market, and its neoliberal rationalities, against itself and created new spaces for agency. While market jamming comes with real financial risks, such as a rhetorical panic, it also shows how investors can use détournement in the marketplace.

Did David win a battle or the war against Goliath? Dynamic return and volatility connectedness between the GameStop stock and the high short interest indices

Can a short-squeeze incident trigger financial contagion over heavily shorted companies? The recent GameStop frenzy provides a unique natural experiment to explore this question. This study examines the static and dynamic return and volatility connectedness among the GameStop stock, the novel market-wide and sectoral short-interest indices, and the U.S. stock market. Contrary to anecdotal evidence, we find that the GameStop stock is not a net transmitter but a net recipient of return and volatility spillovers from other companies shorted in the market. This result agrees with the view that short-interest indices provide price discovery for shorted stocks. Therefore, although David might have won a battle against Goliath, he does not seem to win the war.

Unpredicted costly dividends and temporary short squeezes

AbstractWe argue that cash dividend is a type of arbitraging cost that short sellers tend to avoid. We find that dividend announcements lead to temporary short squeezes, causing the prices of highly shorted stocks to overshoot and fully revert over time. These stocks also experience excessive buy‐initiated trades and abnormal trading volume in response to dividend announcements. These results are driven mainly by stocks with unpredicted dividends, low lending fees, and high dividend yields. Overall, results suggest that news of a dividend distribution is magnified by short squeezes due to increased short costs and generates excessive nonfundamentals‐driven price fluctuations.

Are short stocks susceptible to geopolitical shocks? Time-Frequency evidence from the Russian-Ukrainian conflict

The geopolitical conflict between Russia and Ukraine has noted derailing impacts on financial markets. Since tensions from geopolitical risks (GPR) can amplify pessimistic views of investors, we envisage this issue from the position of shorted stocks. In a wavelet-based analysis, we examine the impact of the Russian-Ukrainian military conflict on different economic sectors. We found strong and high comovements between shorted stocks and GPR. The lead-lag dynamics evidence that hedging strategies with shorted stocks would be beneficial, particularly in the very short-term. The findings are important for policymakers, practitioners, investors, and risk managers during black swan events like military conflicts.

Zombification and Industry 4.0—Directional Financialisation against Doomed Industrial Revolution

This contribution addresses the puzzle of whether Industry 4.0 is able to autochthonously bring back the real economy (non-financial corporate sector) into the consciousness of the financial sector. It is all the more important since the conventional wisdom over financialisation says that it cannot be reversed without re-establishing the command of the social and collective over the private and individual for the modern era. Our paper argues that a healthy diffusion of Industry 4.0 is doomed unless some directionality is set within the financialisation process. To this end, by building on the relevant lessons of complexity science, it investigates the complex nexus among financialisation, zombification and Industry 4.0 development, an aspect which is not even sporadically examined in the literature. After presenting a short stock take on excessive financialisation, the paper deciphers the main systemic channels of zombification affecting negatively the outlooks of Industry 4.0. Some important policy recommendations are drawn as well.

Business Cycle Variation in Short Selling Strategies: Picking During Expansions and Timing During Recessions

AbstractWe present evidence that short sellers alternate between stock picking during expansions and market timing during recessions. First, firm-level short interest is a much stronger negative predictor of the cross-section of stock returns during expansions than it is during recessions. High short interest also only predicts negative future earnings announcement returns during expansions. We attribute these findings to short sellers’ emphasis on collecting firm-specific signals. Second, short sellers appear to make factor bets more so during recessions than during expansions. These bets tend to pay off as we observe a strong negative relation between the betas of highly shorted stocks and future stock market returns, a result that disappears during expansions. Together, these findings are consistent with theories of information acquisition under attention constraints, endogenous information production, as well as theories of time variation in aggregate overconfidence amongst traders.

Far away from home: Investors’ underreaction to geographically dispersed information

Using a novel data set to identify geographic peer firms based on the locations of both firms’ headquarters and material subsidiaries, we show that returns on geographical peers have strong predictive power for focal firm returns. A value-weighted long-short strategy that buys stocks with the highest geo-peer returns and shorts stocks with the lowest geo-peer returns generates a Fama and French(2015) five-factor alpha of 0.6% per month. This strategy is distinct from other cross-firm momentum strategies and cannot be explained by local economic conditions. The effect is more pronounced among firms that receive less investor attention and that are more costly to arbitrage, consistent with slow information diffusion in the geographic network into stock prices.

Longs, shorts, and the cross-section of stock returns

We study the relation between severe investor disagreement and stock returns based on the observed short-interest and long positions of hedge funds. We show strong disagreements are prevalent among active, sophisticated investors. From 1997 to 2014, 30% of highly shorted stocks have high hedge fund ownership, but these stocks do not earn abnormal returns. Evidence shows that large simultaneous holdings of short sellers and hedge fund managers likely arise from their information-acquisition activities. Although active long or short positions on average predict subsequent stock returns, neither long investors nor short sellers consistently prevail when the two sides disagree.

Media sentiment and short stocks performance during a systemic crisis

During crisis periods, investors often engage in short selling of stocks, in line with their pessimistic view of the present and future market performance as well as with the hope to repurchase the stocks back in the future at much lower prices. This attitude not only affects stock returns, but also may lead to significant risk transmission among assets. Addressing this concern, our study examines the returns and volatility connectedness between media coverage index (MCI) and high short interest stocks during the recent Covid-19 pandemic. We document MCI as a net transmitter for all returns series, whereas the results for volatility series exhibits binary behavior, acting as either a transmitter or recipient depending on the considered sector of economic activity. We highlight that the healthcare and energy sector stocks behave as net recipients of both, returns and volatility; hence, a certain caution is required while including them in investment portfolios. Finally, the causality test indicates that the MCI is more strongly connected with stock returns than with volatilities, thus signaling that media, may not only provoke a rise in stock volatility, but cause intense risk transmission especially during a systemic crisis similar to Covid-19.

Does short‐selling affect mutual fund shareholdings? Evidence from China

AbstractTaking the gradual lifting of short‐sale bans in China as natural experiments, the paper shows that mutual funds reduce the number of shares in shortable stocks compared to short‐selling forbidden stocks after short‐selling reforms, and their selling is more intensive in stocks with higher valuation, larger market value, higher profitability, more media coverage or better corporate governance. These strategies are not just short‐term reactions, nor are they applied by other institutional investors. Short‐sellers process negative information to dampen overvaluation or spread pessimistic beliefs which undervalue high quality, so mutual funds’ negative reaction towards short‐selling is stronger among overvalued or high‐quality stocks.

Disagreement in the Equity Options Market and Stock Returns

Abstract We estimate investor disagreement from synthetic long and short stock trades in the equity options market. We show that high disagreement predicts low stock returns after positive earnings surprises and high stock returns after negative earnings surprises. The negative effect is stronger for high-beta stocks and stocks that are more difficult to sell short. In the cross-section of all stocks and the subset of the 500 largest companies, high disagreement robustly predicts low monthly and weekly stock returns.

Does monetary policy uncertainty command a risk premium in the Chinese stock market?

AbstractWe examine the pricing implications of monetary policy uncertainty (MPU) in the cross‐section of stock returns in the Chinese stock market. Our results show that the long‐short portfolio that is long stocks with the lowest exposures to innovations in MPU and short stocks with the highest exposures to innovations in MPU earns about 6% annualized alpha. The coskewness, idiosyncratic volatility, size, and book‐to‐market effects cannot account for the low (high) average returns earned by stocks with high (low) exposures to innovations in MPU. Furthermore, the exposure to innovations in MPU commands a significantly negative risk premium in the Fama‐MacBeth regressions. These results indicate that investors have preferences for the early resolution of MPU.