Market Efficiency and Limits to Arbitrage: Evidence from the Volkswagen Short Squeeze

Franklin Allen, Marlene Haas, Eric Nowak and Angel Tengulov
Additional contact information
Franklin Allen: Imperial College London
Marlene Haas: Independent researcher
Eric Nowak: University of Lugano and Swiss Finance Institute
Angel Tengulov: Independent researcher

No 17-64, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: On October 26, 2008, Porsche announced its domination plan for Volkswagen. This announcement caused a short squeeze that briefly made Volkswagen the most valuable listed company in the world. Using this event and Germany's regulatory framework as a unique experimental setting, we argue that effective disclosure regulation and enforcement of securities laws are important in modern financial markets. We provide the first forensic academic study of the Porsche-VW squeeze and show that it significantly impeded price discovery and market efficiency. These limits to arbitrage in the form of short sale risks imply significant costs to the arbitrageurs involved.

Keywords: Limits to arbitrage; short selling; stock cornering (search for similar items in EconPapers)
Pages: 60 pages
Date: 2017-06, Revised 2018-05
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1764

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