Short Selling. Strategies, Risks, And Rewards

The Mechanics of Short Selling

Mechanics of the Equity Lending Market 

Jeff Cohen, David Haushalter, and Adam V. Reed

The Lending Process

Lenders

Borrowers

The Determinants of Rebate Rates

Shorting Using Futures and Options 

Futures Contracts

Equity Options

CHAPTER 4

Is Selling ETFs Short a Financial “Extreme Sport”? 37

Gary L. Gastineau

What Are the Most Important Safety Features

Protecting ETF Short Sellers? 38

How Do ETFs Work in Risk Management Applications? 39

Who Owns ETF Shares? 43

Will It Always Be Possible to Borrow ETF Shares at

Low-Cost for Risk Management Applications? 47

What Is the Effect of Short Selling and Risk Management

Activity on ETF Trading Volume and Trading Costs? 49

Are Risk Management Applications and Heavy ETF Share Trading

Desirable for Fund Shareholders and Fund Advisors? 51

What Is the Significance of the Short Interest for

Growth in ETF Assets? 52

Conclusion 56

SECTION TWO

Theory and Evidence on Short Selling 59

CHAPTER 5

Restrictions on Short Selling and Exploitable Opportunities for Investors 61

Edward M. Miller

Demand and Supply Curves Arguments 62

The Pattern of Stock Prices Over Time with

Uninformed Investors 75

The Bounded Efficient Markets Hypothesis 91

Conclusions 114

CHAPTER 6

Implications of Short Selling and Divergence of Opinion for Investment Strategy 117

Edward M. Miller

Interaction of Divergence of Opinion and Short Selling Restrictions 119

Empirical Tests 134

Conclusions 176

CHAPTER 7

Short Sale Constraints and Overpricing 179

Owen A. Lamont

Short Sale Constraints 180

The Overpricing Hypothesis 184

Costs of Shorting 188

Go Down Fighting 191

3Com/Palm 193

Tech Stock Mania and Short Sale Constraints 200

Summary 203

CHAPTER 8

How Short Selling Expands the Investment Opportunity Set and

Improves Upon Potential Portfolio Efficiency 205

Steven L. Jones and Glen Larsen

Short Selling in Efficient Portfolios: The Theory and

Its Practical Implications 207

The Empirical Evidence on Short Positions in Ex Post

Efficient Portfolios 229

Concluding Remarks and Practical Implications for Investors 231

CHAPTER 9

The Information Content of Short Sales 233

Steven L. Jones and Glen Larsen

Short Sales: Reporting, Frequency, and Constraints 235

Academic Theory versus the Technical Analyst’s View 236

The Empirical Evidence 239

Conclusions and Implications for Investors 253

SECTION THREE

Short Selling Strategies 257

CHAPTER 10

Spotting Clues in Qs 259

Ron Gutfleish and Lee Atzil

Looking for the Easier Fight 260

Putting on the Green Eyeshades 261

So What? It’s Only Accounting 265

How Do You Find these Cases? 266

Diagnosis 270

Keeping Your Shorts On 270

Tales from the Front Lines: Three Examples 271

Summary 278

CHAPTER 11

The Economic Profit Approach to Short Selling 279

James A. Abate and James L. Grant

Short Selling in the Theory of Finance 280

Tenets of Good and Bad Companies 280

Positive NPV: Discovery of Good Companies 281

Negative NPV: Discovery of Bad Companies 284

Zero NPV: Wealth Neutral Companies 287

Case Studies 287

Role of the Value/Capital Ratio 291

Invested Capital Growth 292

Managerial and Investor Implications 294

Matrix of Good and Bad Companies 295

Reconciling Market Implied Growth 298

Summary 301

CHAPTER 12

Long-Short Equity Portfolios 303

Bruce I. Jacobs and Kenneth N. Levy

Constructing a Market Neutral Portfolio 304

The Importance of Integrated Optimization 308

Adding Back a Market Return 312

Some Concerns Addressed 316

Evaluating Long-Short 318

SECTION FOUR

Short Selling and Market Efficiency 321

CHAPTER 13

Short Sales in Global Perspective 323

Arturo Bris, William N. Goetzmann, and Ning Zhu

Short Sales Restrictions Around the World 325

Foreign Listing and Short Selling 331

Short Selling Constraints and International Capital Flows 339

Conclusion 342

CHAPTER 14

Short Selling and Financial Puzzles 345

Edward M. Miller

Divergence of Opinion and Risk 346

Returns to Beta 355

Implications for Value Additivity 374

Conclusions 393

INDEX 395