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Detecting the great short squeeze on Volkswagen

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  • Godfrey, Keith R.L.

Abstract

On 28 October 2008 a short squeeze on Volkswagen stock propelled this car maker to become the world's most valuable company for a day. I study the market behavior empirically and investigate whether the timing of the price spike could have been anticipated from earlier trading. I utilize price information from regional stock exchanges in parallel with the primary electronic trading platform Xetra. Although the trading volume on the seven regional exchanges is small, the geographical variation in traded prices shows anomalies when the law of supply and demand begins to overrule the law of one price, and this is observed more than 24h ahead of the price peak. I find that the coefficient of variation in the prices at the regional exchanges is a leading indicator of the Volkswagen price spike.

Suggested Citation

  • Godfrey, Keith R.L., 2016. "Detecting the great short squeeze on Volkswagen," Pacific-Basin Finance Journal, Elsevier, vol. 40(PB), pages 323-334.
    • Handle: RePEc:eee:pacfin:v:40:y:2016:i:pb:p:323-334
    DOI: 10.1016/j.pacfin.2016.02.001
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    Cited by:

    1. Dilger, Alexander, 2016. "Bedingte Aktiengeschäfte," Discussion Papers of the Institute for Organisational Economics 08/2016, University of Münster, Institute for Organisational Economics.
    2. Allen, Franklin & Haas, Marlene D. & Nowak, Eric & Tengulov, Angel, 2021. "Market efficiency and limits to arbitrage: Evidence from the Volkswagen short squeeze," Journal of Financial Economics, Elsevier, vol. 142(1), pages 166-194.

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    More about this item

    Keywords

    Short squeeze; Volkswagen; Porsche; Regional variation; Law of one price; Limits to arbitrage;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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