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

Authors

  • Honghui Chen,

  • Vijay Singal

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    • Chen is from the University of Baltimore and Singal is from Virginia Tech. The authors thank Erik Benrud, John Easterwood, Huseyin Gulen, Greg Kadlec, Raman Kumar, Abon Mozumdar, Doug Patterson, Don Rich, Barbara Remmers, and especially an anonymous referee and Richard Green (the editor) for comments. We thank NYSE Research division and the NASDAQ for providing access to short interest data. Singal acknowledges partial financial support from a Virginia Tech summer grant. All errors are our own.


ABSTRACT

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.

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