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Short-covering bubbles

Author

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  • Guimaraes, Bernardo
  • Pannella, Pierluca
Abstract
This paper argues that short selling might give rise to bubbles that would otherwise not exist. An asset with zero fundamental value might be traded at a positive price by rational agents. We call it a short-covering bubble because it is sustained by short-sellers covering their positions. Agents trade according to their beliefs on how long the bubble will persist.

Suggested Citation

  • Guimaraes, Bernardo & Pannella, Pierluca, 2024. "Short-covering bubbles," Journal of Economic Theory, Elsevier, vol. 219(C).
    • Handle: RePEc:eee:jetheo:v:219:y:2024:i:c:s0022053124000528
    DOI: 10.1016/j.jet.2024.105846
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    More about this item

    Keywords

    Short-selling; Short-squeeze; Equity lending; Overpricing; GameStop; Meme stocks;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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