Hostname: page-component-cd9895bd7-dzt6s Total loading time: 0 Render date: 2024-12-25T07:50:26.819Z Has data issue: false hasContentIssue false
  • English
  • Français

Short Squeezes and Their Consequences

Published online by Cambridge University Press:  04 January 2023

Paul Schultz Open the ORCID record for Paul Schultz [Opens in a new window]
Paul Schultz*
Affiliation:
University of Notre Dame Mendoza College of Business
*
pschultz@nd.edu
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

A short squeeze occurs if borrowed shares are recalled and the short seller is unable to find another source of shares. This forces the short seller to terminate a position early. For most stocks, the probability of a short squeeze is very low. Short squeezes, however, are not unusual for the hardest to borrow stocks. For these stocks, trading costs from squeezes are high and have a significant impact on the returns to short selling. For hard-to-borrow stocks, short sellers also miss out on significant abnormal returns because squeezes force them to close positions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 1 , February 2024 , pp. 68 - 96
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

I am grateful to Hendrik Bessembinder (the editor), Joseph Engelberg (the referee), Ben Golez, Adam Reed, Avanidhar Subrahmanyam, Kumar Venkataraman, and seminar participants at the University of Notre Dame and the 2021 Florida State University Suntrust Beach Conference for helpful comments and suggestions and to Nathan Kholodenko for clarifying how short-selling variables are calculated by IHS Markit and for explaining institutional details of the stock lending market.

References

Andrews, S.; Lundblad, C.; and Reed, A.. “Dancing to the Same Tune: Commonality in Securities Lending Fees.” Working Paper, University of North Carolina (2020).CrossRefGoogle Scholar
Asquith, P.; Pathak, P.; and Ritter, J.. “Short Interest, Institutional Ownership, and Stock Returns.” Journal of Financial Economics, 78 (2005), 243–276.CrossRefGoogle Scholar
Beneish, M. D.; Lee, C. M. C.; and Nichols, D. C.. “In Short Supply: Short-Sellers and Stock Returns.” Journal of Accounting and Economics, 60 (2015), 33–57.CrossRefGoogle Scholar
Blocher, J.; Reed, A.; and Van Wesep, E.. “Connecting Two Markets: An Equilibrium Framework for Shorts, Longs, and Stock Loans.” Journal of Financial Economics, 108 (2013), 302–322.CrossRefGoogle Scholar
Blocher, J., and Ringgenberg, M.. “Short Covering.” Working Paper, Vanderbilt University (2019).CrossRefGoogle Scholar
Boehme, R.; Danielsen, B.; and Sorescu, S.. “Short-Sale Constraints, Differences of Opinion and Overvaluation.” Journal of Financial and Quantitative Analysis, 41 (2006), 455–487.CrossRefGoogle Scholar
Boehmer, E.; Huszar, Z.; Wang, Y.; and Zhang, X.. “Are Shorts Equally Informed? A Global Perspective.” Working Paper, Singapore Management University (2018).Google Scholar
Chuprinin, O., and Ruf, T.. “Let the Bear Beware: What Drives Stock Recalls.” Working Paper, University of New South Wales (2017).Google Scholar
Cohen, L.; Diether, K.; and Malloy, C.. “Supply and Demand Shifts in the Shorting Market.” Journal of Finance, 62 (2007), 2061–2096.CrossRefGoogle Scholar
D’Avolio, G. “The Market for Borrowing Stock.” Journal of Financial Economics, 66 (2002), 271–306.CrossRefGoogle Scholar
Desai, H.; Thiagarajan, K. R.; and Balachandran, B.. “An Investigation into the Role of Short Interest in the Nasdaq Market.” Journal of Finance, 57 (2002), 2263–2287.CrossRefGoogle Scholar
Diether, K. “Short Selling, Timing, and Profitability.” Working Paper, Ohio State University (2008).Google Scholar
Duffie, D.; Gârleanu, N.; and Pedersen, L.. “Securities Lending, Shorting, and Pricing.” Journal of Financial Economics, 66 (2002), 307–339.CrossRefGoogle Scholar
Engelberg, J.; Evans, R.; Leonard, G.; Reed, A.; and Ringgenberg, M.. “The Loan Fee Anomaly: A Short Seller’s Best Ideas.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3707166 (2020).CrossRefGoogle Scholar
Engelberg, J.; Reed, A.; and Ringgenberg, M.. “Short-Selling Risk.” Journal of Finance, 73 (2018), 755–786.CrossRefGoogle Scholar
Fama, E., and French, K.. “A Five-Factor Asset Pricing Model.” Journal of Financial Economics, 116 (2015), 1–22.CrossRefGoogle Scholar
Geczy, C.; Musto, D.; and Reed, A.. “Stocks are Special Too: An Analysis of the Equity Lending Market.” Journal of Financial Economics, 66 (2002), 241–269.CrossRefGoogle Scholar
Goyenko, R., and Schultz, P.. “Volatility and the Cross Section of Equity Returns: Market Frictions vs. Arbitrage Risk.” Working Paper, McGill University (2021).CrossRefGoogle Scholar
Jones, C., and Lamont, O.. “Short-Sale Constraints and Stock Returns.” Journal of Financial Economics, 66 (2002), 207–239.CrossRefGoogle Scholar
Kelley, E., and Tetlock, P.. “Retail Short Selling and Stock Prices.” Review of Financial Studies, 30 (2017), 801–832.CrossRefGoogle Scholar
Kolasinski, A.; Reed, A.; and Ringgenberg, M.. “A Multiple Lender Approach to Understanding Supply and Search in the Equity Lending Market.” Journal of Finance, 68 (2012), 559–595.CrossRefGoogle Scholar
Lamont, O. “Go Down Fighting: Short Sellers vs. Firms.” Review of Asset Pricing Studies, 2 (2012), 1–30.CrossRefGoogle Scholar
Ljungquist, A., and Qian, W.. “How Constraining are Limits to Arbitrage?” Review of Financial Studies, 29 (2016), 1975–2028.CrossRefGoogle Scholar
Miller, E., “Risk, Uncertainty, and Divergence of Opinion.” Journal of Finance, 32 (1977), 1151–1168.CrossRefGoogle Scholar
Muravyev, D.; Pearson, N.; and Pollet, J.. “Is There a Risk Premium in the Stock Lending Market? Evidence from Equity Options.” Journal of Finance, 77 (2022), 1787–1828.CrossRefGoogle Scholar
Nagel, S. “Short Sales, Institutional Investors and the Cross-Section of Stock Returns.” Journal of Financial Economics, 78 (2005), 277–309.CrossRefGoogle Scholar
Supplementary material: PDF

Schultz supplementary material

Schultz supplementary material

Download Schultz supplementary material(PDF)
PDF 304.6 KB