Is There a Short Interest Factor?

Nov 20, 2017

We introduce a new integrated short interest factor that combines multiple dimensions of short interest. The new factor combines information on the amount of shorting activity in the securities-lending market, the available lending supply, the rates investors are paying to short a security (borrow rates) and an adjustment for shorting activity due to dividend arbitrage. We find that dividend-arbitrage strategies can create large biases in short interest factors, particularly in Europe. We also find that short interest is a robust factor that provides unique explanatory power in the cross section of stock returns beyond what is explained by other well-known factors in every major market region.