Premium
SHORT SELLING AND MISPRICINGS WHEN FUNDAMENTALS ARE KNOWN: EVIDENCE FROM NYSE‐TRADED CLOSED‐END FUNDS
Author(s) -
Flynn Sean Masaki
Publication year - 2010
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2010.01277.x
Subject(s) - portfolio , closed end fund , monetary economics , economics , value (mathematics) , financial economics , short interest ratio , business , value premium , rate of return on a portfolio , modern portfolio theory , capital asset pricing model , market liquidity , mathematics , biology , paleontology , statistics , context (archaeology)
The larger a closed‐end fund's premium over its portfolio value, the more intensely it is sold short. This behavior should reduce mispricings. However, short selling affects neither the observed rate at which premia revert to fundamental values nor the rate of return on a fund's shares. This apparent contradiction can be explained as follows: short selling does reduce prices, but the effect is impounded into prices by the time short positions are tabulated by the NYSE each month. Consequently, the monthly short selling data do not predict future price movements.