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Is There a Short Interest Factor?

categories: Portfolio Management Analytics, Americas, EMEAI, Factor and Risk Modeling, Investing (Investment Management), Portfolio Construction and Optimization, Risk Management, Asia Pacific, Asset Owners, Hedge Funds, Equities, Equity Risk Models, MELAS Dimitris, Asset Managers (Quant or Fundamental), VIPUL Jain, BONNE George, general

We introduce a new integrated short interest factor that combines multiple dimensions of short interest. The new factor combines information on the amount of shorting activity in the securities-lending market, the available lending supply, the rates investors are paying to short a security (borrow rates) and an adjustment for shorting activity due to dividend arbitrage. We find that dividend-arbitrage strategies can create large biases in short interest factors, particularly in Europe. We also find that short interest is a robust factor that provides unique explanatory power in the cross section of stock returns beyond what is explained by other well-known factors in every major market region.

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