Professor of Finance
Disposition Effect; Behavioral Finance; Short Selling; JEL Classification: G10; G12; G14;
The authors investigate whether short sellers are subject to the disposition effect. Consistent with the disposition effect, short sellers are less likely to close a position after experiencing capital losses. This tendency is associated with lower profitability, suggesting a behavioral bias. Furthermore, this tendency is weaker when short sells are likely part of a long-short strategy. In addition, the closing pattern of short sellers exhibits a hump shape relative to capital gains, the opposite of what has been established for individual long-only investors. Overall, short sellers' behavioral biases limit their ability to arbitrage away mispricing caused by other traders' disposition effect.