Aggregate Short Interest and Market Valuations

We examine some basic data on the evolution of aggregate short interest, both during the dot-com era, and at other times in history. Total short interest moves in a countercyclical fashion. For example, short interest in NASDAQ stocks actually declines as the NASDAQ index approaches its peak. Moreover, this decline does not seem to reflect a substitution away from outright short-selling and towards put options, as the ratio of put-to-call volume displays the same countercyclical tendency. The evidence suggests that: i) arbitrageurs are reluctant to bet against aggregate mispricings; and ii) short-selling does not play a particularly helpful role in stabilizing the overall stock market. * Lamont: School of Management, Yale University, New Haven, CT 06520. Stein: Department of Economics, Harvard University, Cambridge, MA 02138. Thanks to the National Science Foundation for financial support, to Stefan Nagel and John Griffin for providing some of the data, to Andrea Frazzini and James David for research assistance, and to Harrison Hong, Charles Jones and Andrei Shleifer for helpful comments.