Goldman Sachs Asset Management
200 West Street New York, New York 10282 United St
Institutional Affiliation: Quantitative Investment Strategies, Goldman Sachs Asset Management
NBER Working Papers and Publications
|May 2015||Days to Cover and Stock Returns|
with Harrison Hong, Weikai Li, Sophie X. Ni, Jose A. Scheinkman: w21166
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 benefit, 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.