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Mining the Short Side: Institutional Investors and Stock Market Anomalies

Published online by Cambridge University Press:  04 May 2022

Xin Gao  and
Ying Wang Open the ORCID record for Ying Wang [Opens in a new window]
Xin Gao
Affiliation:
Sacred Heart University Jack Welch College of Business [email protected]
Ying Wang*
Affiliation:
State University of New York at Albany School of Business and Center for Institutional Investment Management
*
[email protected] (corresponding author)
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Abstract

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This article investigates the short-side anomaly trading behavior of alternative mutual funds (AMFs) based on their short positions in U.S. domestic equities. In aggregate, AMFs demonstrate the ability to exploit well-documented stock market anomalies on the short side, and the overpriced stocks sold short by AMFs generate significant negative alpha. Further, AMFs’ short-side trades exhibit significant return predictability, which can at least partially derive from their ability to process public information on firm and anomaly characteristics. Finally, AMFs’ short-side anomaly-based trading activity and profitability appear to be more pronounced among the stocks with higher credit risk or dynamic short-selling risk.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 1 , February 2023 , pp. 392 - 418
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful to an Hendrik Bessembinder (the editor), Nicole Boyson (the referee), Si Cheng, Egemen Genc, Betsy Laydon, Linghang Zeng, Yifeng Zhu, and seminar participants at the 2018 Australasian Finance and Banking Conference, 2019 China International Conference in Finance, 2019 Eastern Finance Association Annual Meeting, 2019 Financial Management Association Annual Meeting, 2019 Midwest Finance Association Annual Meeting, and 2019 Southern Finance Association Annual Meeting for helpful comments and suggestions on an earlier draft of the paper entitled “Do Institutional Investors Exploit Market Anomalies? New Evidence from Alternative Mutual Funds.”

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