The short-selling skill of institutions and individuals: a market-wide and out-of-sample analysis

Abstract

Using market-wide data from the Brazilian stock lending market, we find strong evidence of short-selling skill for some institutions and individuals. Skilled short-sellers present out-of-sample performance persistence, both over time and across stocks. Performance persistence is robust: by randomly splitting the sample across stocks, we show that performance in a group of stocks often predicts performance in another group of stocks. We then study how skilled short-sellers trade. We find that most of their profit does not come from firm-specific private information, they follow short-term momentum strategies, and they do not display the disposition effect.