[...]... Goetzmann, and Ning Zhu Short Sales Restrictions Around the World Foreign Listing and Short Selling Short Selling Constraints and International Capital Flows Conclusion CHAPTER 14 Short Selling and Financial Puzzles Edward M Miller Divergence of Opinion and Risk Returns to Beta Implications for Value Additivity Conclusions INDEX 3 21 323 325 3 31 339 342 345 346 355 374 393 395 Foreword Short selling is... of Good and Bad Companies Reconciling Market Implied Growth Summary CHAPTER 12 Long -Short Equity Portfolios Bruce I Jacobs and Kenneth N Levy Constructing a Market Neutral Portfolio The Importance of Integrated Optimization Adding Back a Market Return Some Concerns Addressed Evaluating Long -Short 295 298 3 01 303 304 308 312 316 318 SECTION FOUR Short Selling and Market Efficiency CHAPTER 13 Short Sales... several advantages to selling short in the cash market Buying puts and selling calls are two ways to implement a short- selling strategy in the options market There are trade-offs between buying puts, selling calls, and borrowing the stock in the cash market in order to sell short The relative merits of using futures and options for short selling, along with a review of futures and options and their investment... recent theory and empirical evidence on the practice of short selling The chapters in this book, contributed by leading practitioners and academics, explain not just the complex mechanics of short selling and the associated risks, but also why some stocks can be expected to become overpriced, strategies for exploiting overpricing, and how short selling can improve portfolio performance and market efficiency... cases where extremely high short- sale constraints led to extremely high 4 SHORT SELLING: STRATEGIES, RISKS, AND REWARDS overpricing and thus extremely low subsequent returns He concludes with a discussion suggesting that the “tech stock mania” of 19 98–2000 was attributable to the reluctance of pessimists to go short Steven Jones and Glen Larsen illustrate, in Chapter 8, how short selling has the potential... “no -short constraint on their active managers .1 But for many investors, short selling remains an obscure, even mysterious subject, seemingly more akin to art than investment science S 1 See Bob Litterman, “The Active Risk Puzzle: Implications for the Asset Management Industry,” The Active Alpha Investing Series (Goldman Sachs Asset Management, March 2004) 1 2 SHORT SELLING: STRATEGIES, RISKS, AND REWARDS. .. 1 Using the short selling index from CSFB/Tremont and returns on the S&P 500, and value-growth stocks and small-large stocks (HML and SMB from Professor Ken French’s website http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/ respectively) run the following regression (all returns are either on long /short portfolios or excess over cash) monthly from 19 94–2003: CSFB Short return = intercept + 1. .. about getting rich quickly It is about how shorting works, what short sellers actually do, how shorts uncover the overvalued and the true ponzi schemes, economically why short selling is important, the true impediments to shorting, and a host of other sober, vital, and often neglected topics It is not just about the canonical shortonly manager uncovering fraud and overvaluation as implicitly Foreword... in stocks that are costly to short, but short sales and short interest, while potentially useful, provide no easily discernible signal The question remains as to whether there are any proven strategies for spotting short- sale candidates? Three techniques are discussed in Section Three In Chapter 10 , Ron Gutfleish and Lee Atzi discuss their strategy for “buying stress and shorting comfort.” The strategy... book reflects the most recent theory and empirical evidence on the practice of short selling The chapters that follow explain not just the complex mechanics of short selling, but also why we might expect some stocks to become overpriced, strategies for exploiting overpricing, including the use of derivatives, and how short selling can improve portfolio performance and market efficiency Each chapter contains . of Short Selling and Divergence of Opinion for Investment Strategy 11 7 Edward M. Miller Interaction of Divergence of Opinion and Short Selling Restrictions 11 9 Empirical Tests 13 4 Conclusions 17 6 CHAPTER. 7 Short Sale Constraints and Overpricing 17 9 Owen A. Lamont Short Sale Constraints 18 0 The Overpricing Hypothesis 18 4 Costs of Shorting 18 8 Go Down Fighting 19 1 3Com/Palm 19 3 Tech Stock Mania and. Goetzmann, and Ning Zhu Short Sales Restrictions Around the World 325 Foreign Listing and Short Selling 3 31 Short Selling Constraints and International Capital Flows 339 Conclusion 342 CHAPTER 14 Short