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When do institutional shorts discipline bubbles?

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Listed:
  • Jin, Hengyu
  • Lin, Yuchen
  • Zhang, Hanming

Abstract

This paper investigates when institutional short-selling effectively disciplines asset price bubbles. Using a large panel of 3.9 million firm-day observations from UK-listed stocks between 2005 and 2025, we estimate high-frequency regressions where speculative overpricing is proxied by price deviations from moving averages. We explore two key sources of heterogeneity: (i) investor disagreement, proxied by residual return volatility and analyst forecast dispersion, and (ii) regulatory transparency, exploiting a 2024 reform that raised the public disclosure threshold for short positions from 0.1% to 0.2% in the UK. We find that short-selling has a stronger bubble-reducing effect in environments with higher investor disagreement, suggesting that when opinions are more dispersed, informed arbitrageurs may be better positioned to exploit mispricing and correct price deviations. We also find that short-selling becomes significantly more effective in mitigating bubbles following the relaxation of disclosure rules, suggesting that lower reputation costs may enhance arbitrage activity.

Suggested Citation

  • Jin, Hengyu & Lin, Yuchen & Zhang, Hanming, 2025. "When do institutional shorts discipline bubbles?," Finance Research Letters, Elsevier, vol. 86(PF).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pf:s1544612325020434
    DOI: 10.1016/j.frl.2025.108789
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    References listed on IDEAS

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