NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Days to Cover and Stock Returns

Harrison Hong, Weikai Li, Sophie X. Ni, Jose A. Scheinkman, Philip Yan

NBER Working Paper No. 21166
Issued in May 2015
NBER Program(s):Asset Pricing

The short ratio - shares shorted to shares outstanding - is an oft-used measure of arbitrageurs’ opinion about a stock’s over-valuation. We show that days-to-cover (DTC), which divides a stock’s short ratio by its average daily share turnover, is a more theoretically well-motivated measure because trading costs vary across stocks. Since turnover falls with trading costs, DTC is approximately the marginal cost of the shorts. At the arbitrageurs’ optimum it equals the marginal benefit, which is their opinion about over-valuation. DTC is a better predictor of poor stock returns than short ratio. A long-short strategy using DTC generates a 1.2% monthly return.

download in pdf format
   (558 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w21166

Users who downloaded this paper also downloaded* these:
Drechsler and Drechsler w20282 The Shorting Premium and Asset Pricing Anomalies
Dew-Becker, Giglio, Le, and Rodriguez w21182 The Price of Variance Risk
van Binsbergen and Koijen w21234 The Term Structure of Returns: Facts and Theory
Doidge, Karolyi, and Stulz w21181 The U.S. listing gap
Novy-Marx w21329 Backtesting Strategies Based on Multiple Signals
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us