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Clearing prices under margin calls and the short squeeze

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  • Zachary Feinstein

Abstract

In this paper, we propose a clearing model for prices in a financial markets due to margin calls on short sold assets. In doing so, we construct an explicit formulation for the prices that would result immediately following asset purchases and a margin call. The key result of this work is the determination of a threshold short interest ratio which, if exceeded, results in the discontinuity of the clearing prices due to a feedback loop.

Suggested Citation

  • Zachary Feinstein, 2021. "Clearing prices under margin calls and the short squeeze," Papers 2102.02176, arXiv.org, revised Apr 2022.
    • Handle: RePEc:arx:papers:2102.02176
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    File URL: http://arxiv.org/pdf/2102.02176
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    References listed on IDEAS

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    1. Cont, Rama & Schaanning, Eric, 2019. "Monitoring indirect contagion," Journal of Banking & Finance, Elsevier, vol. 104(C), pages 85-102.
    2. L. C. G. Rogers & L. A. M. Veraart, 2013. "Failure and Rescue in an Interbank Network," Management Science, INFORMS, vol. 59(4), pages 882-898, April.
    3. Zachary Feinstein, 2017. "Obligations with Physical Delivery in a Multi-Layered Financial Network," Papers 1702.07936, arXiv.org, revised May 2019.
    4. Rodrigo Cifuentes & Hyun Song Shin & Gianluigi Ferrucci, 2005. "Liquidity Risk and Contagion," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 556-566, 04/05.
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    Cited by:

    1. Tolga Buz & Gerard de Melo, 2021. "Should You Take Investment Advice From WallStreetBets? A Data-Driven Approach," Papers 2105.02728, arXiv.org.

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