Idiosyncratic Risk and Short Interest Analysis for Canadian Large Cap Stocks

While previous studies have focused on the relation between idiosyncratic risk and short interest in US stock markets, we test whether the Canadian market shows the same symptoms in costs limiting arbitrage. In order to measure arbitrage cost, we use idiosyncratic risk and use it as a proxy to determine the cost level. To prevent any ambiguity and bias in our result, we use commonly recognized indexes to measure both transaction and holding costs. Consistent with the similar study conducted in U.S., we find that high Short Interest Canadian stocks appear to have higher idiosyncratic risk that is significant enough to affect investors’ decisions.