Short-covering bubbles

Bernardo Guimaraes and Pierluca Pannella

Journal of Economic Theory, 2024, vol. 219, issue C

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.

Keywords: Short-selling; Short-squeeze; Equity lending; Overpricing; GameStop; Meme stocks (search for similar items in EconPapers)
JEL-codes: D84 G12 G14 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:219:y:2024:i:c:s0022053124000528

DOI: 10.1016/j.jet.2024.105846

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