Days to Cover and Stock Returns

Harrison G. Hong; Frank Weikai Li; Xiaoyan Ni; Jose A. Scheinkman; Philip Yan

doi:10.2139/ssrn.2568768

Days to Cover and Stock Returns

Harrison G. Hong, Frank Weikai Li, Xiaoyan Ni, Jose A. Scheinkman, Philip Yan

Department of Accountancy, Economics and Finance

Research output: Contribution to conference › Conference paper › peer-review

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.

Original language	English
Number of pages	63
DOIs	https://doi.org/10.2139/ssrn.2568768
Publication status	Published - Dec 2016
Event	29th Australasian Finance and Banking Conference - Shangri-La Hotel, Sydney, Australia Duration: 14 Dec 2016 → 16 Dec 2016 https://www.unsw.edu.au/business/our-schools/banking-finance/news-events/australasian-finance-banking-conference/29th-australasian-finance-banking-conference https://www.unsw.edu.au/content/dam/pdfs/business/banking-finance/events/news-events/2021-09-busines-banking-29th-AFBC-Program.pdf

Conference

Conference	29th Australasian Finance and Banking Conference
Country/Territory	Australia
City	Sydney
Period	14/12/16 → 16/12/16
Internet address	https://www.unsw.edu.au/business/our-schools/banking-finance/news-events/australasian-finance-banking-conference/29th-australasian-finance-banking-conference https://www.unsw.edu.au/content/dam/pdfs/business/banking-finance/events/news-events/2021-09-busines-banking-29th-AFBC-Program.pdf

User-Defined Keywords

Days to Cover
Crowded Trades
Stock Returns

Access to Document

10.2139/ssrn.2568768

Cite this

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title = "Days to Cover and Stock Returns",

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.",

keywords = "Days to Cover, Crowded Trades, Stock Returns",

author = "Hong, {Harrison G.} and Li, {Frank Weikai} and Xiaoyan Ni and Scheinkman, {Jose A.} and Philip Yan",

year = "2016",

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doi = "10.2139/ssrn.2568768",

language = "English",

note = "29th Australasian Finance and Banking Conference ; Conference date: 14-12-2016 Through 16-12-2016",

url = "https://www.unsw.edu.au/business/our-schools/banking-finance/news-events/australasian-finance-banking-conference/29th-australasian-finance-banking-conference, https://www.unsw.edu.au/content/dam/pdfs/business/banking-finance/events/news-events/2021-09-busines-banking-29th-AFBC-Program.pdf",

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T1 - Days to Cover and Stock Returns

AU - Hong, Harrison G.

AU - Li, Frank Weikai

AU - Ni, Xiaoyan

AU - Scheinkman, Jose A.

AU - Yan, Philip

PY - 2016/12

Y1 - 2016/12

N2 - 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.

AB - 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.

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KW - Stock Returns

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