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Short Selling: An evidence-based introduction by James Clunie

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2. Short-Selling in Practice

SO, EQUIPPED WITH some of the above knowledge on the theory and evidence around short-selling, it should be possible for a short-seller to operate in an evidence-based fashion. Yet, despite this possible advantage, short-selling in practice can ‘feel’ very difficult and can, from time to time, be quite painful to practise. Some of the most obvious differences between short-selling and taking long positions are related to risk and risk management. This arises because of a number of peculiarities associated with short-selling.

In theoretical terms, investors require a risk premium to hold risky assets such as equities (in looser language, shares are expected to produce positive returns over the long-term). Short-sellers, ...

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