Acta academica karviniensia 2016, 16(2):16-27 | DOI: 10.25142/aak.2016.011

WHAT MAKES INVESTORS SHORT SELL ETFs?

Dagmar Linnertová¹, Oleg Deev²

¹ Masaryk University, Faculty of Economics and Administration, Lipová 41a, 602 00 Brno, Email: dagmar.linnertova@mail.muni.cz

² Masaryk University, Faculty of Economics and Administration, Lipová 41a, 602 00 Brno, Email: oleg@mail.muni.cz

Short selling exchange-traded funds (ETFs) has become a common means of speculating or hedging in response to pessimistic expectations about a specific market or sector, as the short interest of ETFs is more than 10 times that of individual stocks, on average. The study determines the specific characteristics of globally available ETFs, which influence the level of short interest (such as trading volume, price stability, market capitalization, expense ratio, geographical focus, investment strategy and the availability of derivatives for the underlying index), and tests three most common short sale motivation hypotheses (overpricing, arbitrage and hedging and transaction costs). Using the monthly short interest ratio and the characteristics of ETFs traded in the US market, empirical evidence to support all three short sale motivation hypotheses is provided. The possibility of achieving abnormal returns based on previous levels of short sale is also tested.

Keywords: abnormal returns, exchange-traded funds, short sale

JEL classification: G10, G14

Received: August 27, 2015; Accepted: August 24, 2016; Published: June 30, 2016  Show citation