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CAN SHORT RATIOS PREDICT ABNORMAL RETURNS?

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Author(s): Gil Cohen

Journal: International Journal of Economics and Research
ISSN 2229-6158

Volume: I;
Issue: 1;
Start page: 47;
Date: 2010;
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Keywords: short ratios and abnormal returns on the Nasdaq100 Index

ABSTRACT
In this study we examine the relationship between short ratios and abnormal returns on the Nasdaq100 Index between May and July 2010. Our goal is to investigate whether short ratios can predict short-term abnormal returns and to examine to what extent short ratios of 3 and 5 can serve as bear and bull market predictors. Our results show that in general short ratios are poor predictors of abnormal returns. However, in a relatively small number of Nasdaq100 firms with an average market capitalization of $4.8B, there is a significant negative correlation between short ratios and abnormal returns. An examination of the established benchmarks of 3 and 5 for bear and bull markets reveals a significant negative relationship between abnormal returns and short ratios for firms with a short ratio greater than 3. This result casts doubt on some analysts’ hypothesis that a short ratio greater than 5 suggests a bull market because it signals a strong potential demand for stock. Instead, the results support those analysts who believe that a high short ratio implies the opposite
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