Momentum in Short Selling: The Two Faces of Short Sellers

Abstract

In the literature short sellers are often considered to be informed investors. By accessing a data set of disclosed large European short selling positions with the data of the increase and decrease of positions I model the returns of the short sellers. I find no significant alpha returns in the aggregated portfolio of short sellers, but a high focus on pursuing the Jegadeesh and Titman (1993) momentum factor strategy. Furthermore, on average, shares show significant negative (positive) abnormal returns before short seller increase (decrease) short positions, suggesting that short sellers do not act as contrarians but follow the trend. Distinguishing between events of short sellers with positive or negative momentum loading reveals even stronger evidence for trend following of momentum short sellers. However, short sellers with a negative momentum loading trade as contrarians, thus increase (decrease) their short positions after positive (negative) abnormal returns.