Role of Speculative Short Sales in Price Formation: The Case of the Weekend Effect

We argue that short sellers affect prices in a significant and systematic manner. In particular, we contend that speculative short sales contribute to the weekend effect: The inability to trade over the weekend is likely to cause these short sellers to close their speculative positions on Fridays and reestablish new short positions on Mondays causing stock prices to rise on Fridays and fall on Mondays. We find evidence in support of this hypothesis based on a comparison of high short-interest stocks and low short-interest stocks, stocks with and without actively traded options, IPOs, zero short-interest stocks, and highly volatile stocks. Copyright 2003 by the American Finance Association.

[1]  E. A. Dyl,et al.  MARKET STRUCTURE AND REPORTED TRADING VOLUME: NASDAQ VERSUS THE NYSE , 1997 .

[2]  A. Shleifer,et al.  The Limits of Arbitrage , 1995 .

[3]  Joseph Chen,et al.  Breadth of Ownership and Stock Returns , 2001 .

[4]  Michael R. Gibbons,et al.  Day of the Week Effects and Asset Returns , 1981 .

[5]  A. Scherbina.  Stock Prices and Differences of Opinion: Empirical Evidence that Prices Reflect Optimism , 2001 .

[6]  K. French.  Stock returns and the weekend effect , 1980 .

[7]  E. Miller.  Risk, Uncertainty, and Divergence of Opinion , 1977 .

[8]  Lisa A. Kramer,et al.  Losing Sleep at the Market: The Daylight Saving Anomaly: Reply , 2000 .

[9]  Richard J. Rogalski.  New Findings Regarding Day‐of‐the‐Week Returns over Trading and Non‐Trading Periods: A Note , 1984 .

[10]  Stephen Figlewski,et al.  Options, Short Sales, and Market Completeness , 1993 .

[11]  L. Glosten,et al.  An Investigation of the Informational Role of Short Interest in the Nasdaq Market , 2002 .

[12]  Richard J. Rogalski.  A Further Investigation of the Weekend Effect in Stock Returns , 1984 .

[13]  E. Fama,et al.  Risk, Return, and Equilibrium: Empirical Tests , 1973, Journal of Political Economy.

[14]  Donald B. Keim.  Trading patterns, bid-ask spreads, and estimated security returns: The case of common stocks at calendar turning points , 1989 .

[15]  Yuming Li,et al.  A New Look at the Monday Effect , 1997 .

[16]  Josef Lakonishok,et al.  Are Seasonal Anomalies Real? A Ninety-Year Perspective , 1988 .

[17]  Josef Lakonishok,et al.  The Weekend Effect: Trading Patterns of Individual and Institutional Investors , 1990 .

[18]  Alex Frino,et al.  Short Sales Are Almost Instantaneously Bad News: Evidence from the Australian Stock Exchange , 1998 .

[19]  Su Han Chan,et al.  The Impact of Institutional Investors on the Monday Seasonal , 2004 .

[20]  Patricia M. Dechow,et al.  Short-sellers, fundamental analysis, and stock returns , 2001 .

[21]  Adam V. Reed,et al.  Stocks are Special Too: An Analysis of the Equity Lending Market , 2002 .

[22]  E. Stice,et al.  Short Interest: Explanations and Tests , 1990, Journal of Financial and Quantitative Analysis.

[23]  Maurice D. Levi,et al.  Weekend Effects on Stock Returns: A Note , 1982 .

[24]  Adam V. Reed.  Costly short -selling and stock price adjustment to earnings announcements , 2002 .

[25]  A. Damodaran.  The Weekend Effect in Information Releases: A Study of Earnings and Dividend Announcements , 1989 .

[26]  Laura T. Starks,et al.  Short-Sale Restrictions and Market Reaction to Short-Interest Announcements , 1993, Journal of Financial and Quantitative Analysis.

[27]  K. French,et al.  Stock return variances: The arrival of information and the reaction of traders , 1986 .

[28]  Lisa A. Kramer,et al.  Losing Sleep at the Market: The Daylight-Savings Anomaly , 1999 .

[29]  Robert E. Verrecchia,et al.  Constraints on short-selling and asset price adjustment to private information , 1987 .

[30]  R. Ariel,et al.  High Stock Returns before Holidays: Existence and Evidence on Possible Causes , 1990 .