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   What is the Short Interest (SI) model?
   The Short Interest (SI) model is a percentile (1-100) ranking of stocks based on investor sentiment using the short interest data collected by US exchanges twice per month1. The SI model uses the widely accepted and empirically verified intuition that high levels of short interest reflect negative sentiment on the part of sophisticated investors and are associated with negative future returns. The model is not only a way to identify short candidates, but also identifies long candidates since the absence of short interest shows a lack of negative sentiment. The SI model also intelligently accounts for cost to borrow and arbitrage strategies in its ranking methodology, with 100 representing the highest rank, or a bullish signal.

Our research suggests that arbitrage related-shorts are less informative. The SI model intelligently identifies arbitrage-related shorts and separates them from 'value shorts' that represent directional bets by informed market participants. This improves standalone signal performance and reduces correlation with the suite of other StarMine quant factors.

The final short interest model is conditioned to mitigate the effect of investors leaving short positions to avoid covering dividend payments and investors entering short positions to capitalize on an arbitrage opportunity due to an ongoing merger or acquisition.

Additionally, our research has shown that, while popular, the number of shares in the float is not a reliable proxy for shares available to short. We have found that institutional ownership percentage provides a better proxy for the supply of shares that a bearish investor has to borrow from. As a result, a relatively low institutional ownership percentage indicates a relatively low supply of available shares to short and a high cost to borrow.

The demand factor of short interest percentage and the supply proxy of institutional ownership percentage are the basis for the SI model. A stock with a relatively high short interest (demand) and a relatively low level of institutional ownership (supply) will result in a bearish signal from the SI model, in the absence of any arbitrage-related short activity.

1. Short Interest data is collected bi-monthly from NASDAQ and the New York Stock Exchange. Institutional Ownership data provided by Thomson Reuters updated approximately 45 days after end of each calendar quarter, sourced from 13-F filings. Mergers & Acquisitions and Dividend data provided by Thomson Reuters updated daily.

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