Predatory short selling

Markus Brunnermeier and Martin Oehmke

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 co-exist 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 of short selling for vulnerable institutions and can be used to assess recent empirical evidence on short-sale bans.

JEL-codes: F3 G3 (search for similar items in EconPapers)
Date: 2014-10-01
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Citations: View citations in EconPapers (28)

Published in Review of Finance, 1, October, 2014, 18(6), pp. 2153-2195. ISSN: 1572-3097

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http://eprints.lse.ac.uk/84517/ Open access version. (application/pdf)

Related works:
Journal Article: Predatory Short Selling (2014)
Working Paper: Predatory Short Selling (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:84517

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