Predatory Short Selling

Markus Brunnermeier and Martin Oehmke

No 19514, NBER Working Papers from National Bureau of Economic Research, Inc

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

JEL-codes: G01 G20 G21 G23 G28 (search for similar items in EconPapers)
Date: 2013-10
New Economics Papers: this item is included in nep-ban
Note: AP CF
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Citations: View citations in EconPapers (8)

Published as Markus K. Brunnermeier & Martin Oehmke, 2014. "Predatory Short Selling," Review of Finance, European Finance Association, vol. 18(6), pages 2153-2195.

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Journal Article: Predatory Short Selling (2014)
Working Paper: Predatory short selling (2014)
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