Predatory Trading And Crowded Exits: New thinking on market volatility by Unknown

Author:Unknown
Language: eng
Format: epub

Methodology for identifying exceptional short covering

To identify these, I use simultaneous sorts: I sort stocks into 99th, 95th, and 90th percentiles based on DCR, and narrow down the portfolios by controlling for exceptional changes in short interest on the previous day. The resulting portfolios contain stocks experiencing crowded exits.

To define an ‘exceptional’ reduction in short interest level, note that only publicly-traded stocks are generally loaned and so it is important to consider each firm’s free float, rather than total shares outstanding. I first calculate the change in the free float on loan for each stock on each day. I then calculate the average change across all stocks for any given day.

I divide the daily change in free float on loan for stock i

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