A Long and a Short Leg Make For a Wobbly Equilibrium

72 Pages Posted: 25 Oct 2021

See all articles by Nicolae Garleanu

Nicolae Garleanu

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Stavros Panageas

University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)

Geoffery Zheng

New York University (NYU) - New York University (NYU), Shanghai

Multiple version iconThere are 2 versions of this paper

Date Written: October 19, 2021

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.

Keywords: Asset Pricing with Frictions, Short Selling, Runs, Limits to Arbitrage

JEL Classification: G11, G12, G14

Suggested Citation

Garleanu, Nicolae Bogdan and Panageas, Stavros and Zheng, Geoffery, A Long and a Short Leg Make For a Wobbly Equilibrium (October 19, 2021). Available at SSRN: https://ssrn.com/abstract=3945948 or http://dx.doi.org/10.2139/ssrn.3945948

Nicolae Bogdan Garleanu

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

HOME PAGE: http://faculty.haas.berkeley.edu/garleanu

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Stavros Panageas

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Geoffery Zheng (Contact Author)

New York University (NYU) - New York University (NYU), Shanghai ( email )

1555 Century Ave
Shanghai, Shanghai 200122
China

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