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Predatory Short Selling

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  • Markus K. Brunnermeier
  • Martin Oehmke

Abstract

Financial institutions may be vulnerable to predatory short selling. When the stock of a financial institution is shorted aggressively, leverage constraints imposed by short-term creditors can force the institution to liquidate long-term investments at fire sale prices. For financial institutions that are sufficiently close to their leverage constraints, predatory short-selling equilibria coexist with no-liquidation equilibria (the vulnerability region) or may even be the unique equilibrium outcome (the doomed region). Increased coordination among short sellers expands the doomed region, where liquidation is the unique equilibrium. Our model provides a potential justification for temporary restrictions on short selling of vulnerable institutions and can be used to assess recent empirical evidence on short-sale bans.

Suggested Citation

  • Markus K. Brunnermeier & Martin Oehmke, 2014. "Predatory Short Selling," Review of Finance, European Finance Association, vol. 18(6), pages 2153-2195.
  • Handle: RePEc:oup:revfin:v:18:y:2014:i:6:p:2153-2195.
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    Cited by:

    1. Baltzer, Markus & Koehl, Alexandra & Reitz, Stefan, 2019. "Procyclical leverage in Europe and its role in asset pricing," Discussion Papers 10/2019, Deutsche Bundesbank.
    2. repec:eee:jbfina:v:101:y:2019:i:c:p:77-91 is not listed on IDEAS
    3. repec:oup:rfinst:v:29:y:2016:i:12:p:3278-3320. is not listed on IDEAS
    4. Marco Valerio Geraci & Tomas Garbaravicius & David Veredas, 2016. "Short Selling in the Tails," Working Papers ECARES ECARES 2016-30, ULB -- Universite Libre de Bruxelles.
    5. Yann Braouezec & Lakshithe Wagalath, 2016. "Risk-based capital requirements and optimal liquidation in a stress scenario," Working Papers 2016-ACF-01, IESEG School of Management.
    6. Chague, Fernando Daniel & Bueno, Rodrigo de Losso da Silveira & Giovannetti, Bruno Cara, 2018. "The short-selling skill of institutions and individuals: a market-wide and out-of-sample analysis," Textos para discussão 469, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    7. repec:bla:manchs:v:86:y:2018:i:6:p:770-788 is not listed on IDEAS
    8. Paulo Pereira da Silva, 2016. "Did Investors Seeking Short Exposure Move to the CDS Market after the 2011 Short-Sale Bans in European Financial Stocks?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(4), pages 322-353, August.
    9. repec:pal:assmgt:v:17:y:2016:i:7:d:10.1057_jam.2016.19 is not listed on IDEAS
    10. Óscar Arce & Sergio Mayordomo, 2014. "Short-sale constraints and financial stability: Evidence from the Spanish market," Working Papers 1410, Banco de España;Working Papers Homepage.
    11. repec:oup:revfin:v:21:y:2017:i:2:p:667-718. is not listed on IDEAS
    12. repec:eee:ejores:v:274:y:2019:i:3:p:1180-1197 is not listed on IDEAS
    13. Xuewen Liu, 2015. "Short-Selling Attacks and Creditor Runs," Management Science, INFORMS, vol. 61(4), pages 814-830, April.

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    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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