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Short interest and aggregate stock returns

2016; Elsevier BV; Volume: 121; Issue: 1 Linguagem: Inglês

10.1016/j.jfineco.2016.03.004

1879-2774

David E. Rapach, Matthew C. Ringgenberg, Guofu Zhou,

Corporate Finance and Governance

We show that short interest is arguably the strongest known predictor of aggregate stock returns. It outperforms a host of popular return predictors both in and out of sample, with annual R2 statistics of 12.89% and 13.24%, respectively. In addition, short interest can generate utility gains of over 300 basis points per annum for a mean-variance investor. A vector autoregression decomposition shows that the economic source of short interest’s predictive power stems predominantly from a cash flow channel. Overall, our evidence indicates that short sellers are informed traders who are able to anticipate future aggregate cash flows and associated market returns.