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A Long and a Short Leg Make for a Wobbly Equilibrium

Author

Listed:
  • Nicolae Gârleanu
  • Stavros Panageas
  • Geoffery Zheng

Abstract

We provide a model to explain how the interaction between the spot and lending markets for stocks can lead to abrupt changes in short selling activity. Furthermore, rational short sellers may choose to abandon the market even as mispricing widens. We document empirically that the dynamics of short selling are fat tailed and subject to abrupt changes, especially for the stocks that the model identifies as susceptible to such dynamics.

Suggested Citation

  • Nicolae Gârleanu & Stavros Panageas & Geoffery Zheng, 2026. "A Long and a Short Leg Make for a Wobbly Equilibrium," American Economic Review, American Economic Association, vol. 116(4), pages 1234-1273, April.
    • Handle: RePEc:aea:aecrev:v:116:y:2026:i:4:p:1234-73
    DOI: 10.1257/aer.20211548
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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