The literature and prior empirical evidence analyze short sellers as informed traders who predict negative stock returns as they assess a stock price to be overvalued. However, there exist other types of short sellers who act purely uninformed as they short stock as part of an arbitrage or hedging activity. This motive for short selling has gained in importance due to the explosive growth in hedge funds and market neutral strategies over the past decade. As a result, the recent literature provides evidence that the increased presence of these arbitrage- and hedging-related short sales has contributed to a weakened negative relationship between short interest and future returns, which suggests that the level of short interest has lost its precision as a measure for the negative sentiment of short sellers. Under the continuing growth of arbitrage and hedging strategies, it is therefore important to distinguish between valuation- and arbitrage-based short selling activities. Motivated by this insight and based on the theoretical background of short selling and convertible bond arbitrage, this dissertation investigates aggregate daily short sales for the trading pattern of arbitrage-based short selling activities of a particular type of trader, i.e. the hedging activities of convertible bond arbitrageurs, compared to valuation-based short selling activities.
KeywordsStock Return Hedge Fund Short Selling Hedging Strategy Informed Trader
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