A Long and a Short Leg Make For a Wobbly Equilibrium

Nicolae B. Gârleanu, Stavros Panageas and Geoffery X. Zheng

No 28824, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document the historically bad performance of shorting strategies in late 2020 and early 2021. Short sellers started retreating several weeks before the dramatic growth in the online discussion of January 2021 and across numerous stocks, the majority of which were not heavily discussed online and did not experience an unusual increase in retail buying volume. We provide a model to explain how fears among short sellers can become self-fulfilling and lead to “run-type” behavior. The model also provides a novel explanation why rational short sellers may choose to leave the market even as mispricing widens.

JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2021-05
Note: AP
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Citations: View citations in EconPapers (1)

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