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A fuller theory of short selling

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The expression ‘greed and fear move markets’ is commonly cited to explain trading activity. In this paper, greed and fear form the intellectual basis of a theory explaining short selling activity. The theory describes two independent demands for shares to short sell, one based on future price expectations and one based on financial distress. With the number of shares available to be borrowed rigidly determined by institutional factors, the theory focuses on the quantity of shares shorted. An empirical test of the theory is conducted using a sample of bankrupt companies. The theory's implications are supported by the data and lend strong credence to the importance of greed and fear among short sellers.Journal of Asset Management (2004) 5, 49–63; doi:10.1057/palgrave.jam.2240127
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Document Type: Research Article

Publication date: 2004-06-01

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