“Bond investors could avert significant losses by following the simple rule of selling bonds based on elevated or rising short interest, ” said Paul Griffin, professor at the UC Davis Graduate School of Management, who co-authored the study with Hyun Hong, assistant professor of accounting at the University of Memphis.
The findings are new in the academic literature, according to Griffin.
“Traditionally, traders and academics alike have focused on analyzing the positions of short sellers as an indication for investors to sell the stock, and therefore to avoid the loss from a further decline in the stock’s value,” Griffin writes in a working paper on the research, “Price Discovery in the Corporate Bond Market: The Informational Role of Short Interest.”
In their study, Griffin and Hong analyzed more than 9,000 bond observations, or sales and purchases of a bond in a given month, from 660 companies from 2005 to 2007. They discovered that bonds showed a similar pattern to short sales.
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