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Short-squeeze bubbles

Author

Listed:
  • Bernardo Guimaraes

    (Sao Paulo School of Economics - FGV)

  • Pierluca Pannella

    (Sao Paulo School of Economics - FGV)

Abstract

This paper argues that short selling might give rise to rational bubbles that would otherwise not exist in equilibrium. It is crucial for the argument that short selling is not the same as issuing an asset: it entails a commitment to buy the stock later on. By raising the stock’s future demand, short selling might allow for a path of ever-increasing prices. Several features of our model resemble the short-squeeze episodes of early 2021.

Suggested Citation

  • Bernardo Guimaraes & Pierluca Pannella, 2021. "Short-squeeze bubbles," Discussion Papers 2109, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2109
    as

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    File URL: https://www.lse.ac.uk/CFM/assets/pdf/CFM-Discussion-Papers-2021/CFMDP2021-09-Paper.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    short selling; asset bubbles; Gamestop; overpricing; market frenzies;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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