Aggregate Short Interest and Market Valuations
NBER Working Paper No. 10218
We examine some basic data on the evolution of aggregate short interest, both during the dot-com era, and at other times in history. Total short interest moves in a countercyclical fashion. For example, short interest in NASDAQ stocks actually declines as the NASDAQ index approaches its peak. Moreover, this decline does not seem to reflect a substitution away from outright short-selling and towards put options, as the ratio of put-to-call volume displays the same countercyclical tendency. The evidence suggests that: i) arbitrageurs are reluctant to bet against aggregate mispricings; and ii) short-selling does not play a particularly helpful role in stabilizing the overall stock market.
Published: Lamont, Owen A. and Jeremy C. Stein. "Aggregate Short Interest And Market Valuations," American Economic Review, 2004, v94(2,May), 29-32.