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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
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Abstract

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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.

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