428_lecture5_ShortA_stu - Announcements Problem set 1 due...

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Announcements Problem set 1 due today. Problem set 2 is ready to pick up or download. 09/22/09
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Super Bowl Stcok   by Laura Cohn  1/30/2009  at www.yahool.com The Super Bowl theory: Dow up if original member of NFL wins Dow down if original member of AFL wins (79% correct since 1960) Steelers 27 Cardinals 23 AFC NFC January Effect: Dow ‘s Return -8% Do you think Dow’s return will be up or down this year? 09/22/09
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Review: Arbitrage What are the limits of arbitrage? 09/22/09
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Short Selling and Short Interest (How Smart Are the Bears?) AEM 428 Manny Dong Materials from Charles Lee (2003) & Bhaskaran Swaminathan (2005)
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Lecture Outline 1. Mechanics and Risks Who sells short? Why? How does one sell short? What are the main sources of risk? 2. Research Roundup How does the market for borrowing work? D’Avolio (2002) How Smart are the Bears? Does short interest predict future returns? If so, what measures seem to work best. => Dechow et(2001); Desai (2002) Execution Cost Issues What do we know about short trades? Frequency and execution costs. Short-horizon profitability of short sales. => Angel (2002) Is short interest information really exploitable? Are profits from Dechow et al. (2001) and Desai (2002) illusionary? => Boehme et al. (2002) 09/22/09
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References Book: Walker, Joseph A. (Wiley, 1999): Short Selling Fabozzi, Frank J. (Wiley, 2004): Short Selling Strategies, Risks and Rewards. Articles: D’Avolio, G. (JFE, 2002) The market for borrowing stock Angel, J. (FAJ, forthcoming) A close look at short selling on the Nasdaq market Dechow et al. (JFE, 2001): Short sellers, fundamental analysis and stock returns Desai et al. (JF, forthcoming) An investigation of the informational role of short interest in the Nasdaq market Boehme et al. (DePaul working paper) Short-sale constraints and overvaluation 09/22/09
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Part I. Mechanics and Risks 09/22/09
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What is Short-Selling? Definitions Selling-long is selling a security that one owns. Selling-short is selling a security that the seller does not own, but promises to deliver by borrowing it from someone else. Selling “against the box” is selling short a security that one also owns, temporarily, typically for tax reasons. Naked short selling the practice of selling a stock short, without first borrowing the shares or ensuring that the shares can be borrowed as is done in a conventional short sale. 09/22/09
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Historically, short-selling has a certain negative stigma associated with it. Short-sellers are perceived by some as profiting from the calamities of others. Others believe short-selling de-stabilize markets. Corporate managers typically do not like short-sellers. In many countries it is illegal to sell-short. Even where it is allowed, short-sellers typically face many constraints. 09/22/09
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428_lecture5_ShortA_stu - Announcements Problem set 1 due...

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