Days to Cover and Stock Returns
By Professor Harrison Hong,
John H. Scully '66 Professor of Economics and Finance,
Department of Economics, Princeton University
Abstract
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 benet, 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.
About the Speaker
Harrison Hong is the John Scully ’66 Professor of Economics and Finance at Princeton University, where he teaches courses in finance in the undergraduate, master and Ph.D. programs. Before joining Princeton in 2002, he was on the faculty of the Graduate School of Business at Stanford University. He received his B.A. in economics and statistics with highest distinction from the University of California at Berkeley in 1992 and his Ph.D. in economics from M.I.T. in 1997. His research has covered topics such as: behavioral finance and stock market efficiency; asset pricing and trading under market imperfections; incentives and biases in decision making; organizational form and performance; and social interaction and markets. He is on the editorial board of the Journal of Finance. He is a Director of the American Finance Association and a research associate at the National Bureau of Economic Research. In 2009, he was awarded the American Finance Association’s Fischer Black Prize, given biennially to the person under 40 who has contributed the most to the theory and practice of finance.
Seminar Details
| Date |
Thursday, 3 September 2015 |
| Time |
10:15am to 11:45am |
| Venue |
Singapore Management University
Lee Kong Chian School of Business
Meeting Room 5.4 |
| Address |
50 Stamford Road
Singapore 178899
(Click here for map) (Building #2)
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| Register |
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