Short Interest as a Predictor of Stock Return: An Empirical Analysis

Abstract

This thesis presents an empirical analysis of the portfolio returns generated by short interest investment strategies and evaluates the performance using the Fama-French five-factor model. We compare the results obtained from this model with the Sharpe ratio of the strategy. Our findings indicate that high levels of short interest are predictive of abnormal returns. The absence of short interest corresponds to no abnormal return and in the least conservative strategy, negative abnormal returns are observed. The Fama-French five-factor model provides only marginal explanatory power beyond that offered by the three-factor model. This suggests that additional factors should be considered in future research on the topic to better understand the drivers of portfolio returns in the context of short interest investment strategies.