Dynamics of Bankrupt Stocks

21 Pages Posted: 22 Apr 2012

See all articles by Richard Sowers

Richard Sowers

University of Illinois at Urbana-Champaign - Department of Mathematics

Xiao Li

affiliation not provided to SSRN

Mike Lipkin

Columbia University; Katama Trading, LLC

Date Written: April 10, 2012

Abstract

We model and study the behavior of bankrupt stocks. We are interested in the dynamics of stocks and options, and in particular the cost of establishing positions with negative delta.

This extends a model of Avellaneda and Lipkin which was used to model hard-to-borrow stocks. This model is a two-dimensional integrate-and-fire model which captures the self-reinforcing aspect of short squeezes and subsequent "crashes" when price support at some point vanishes. The only source of randomness in our model is the timing of these crashes. We understand the asymptotic behavior of this mode and the risk-neutral measure.

Keywords: bubbles, hard-to-borrow, put-call parity

JEL Classification: G13, G14

Suggested Citation

Sowers, Richard and Li, Xiao and Lipkin, Michael D., Dynamics of Bankrupt Stocks (April 10, 2012). Available at SSRN: https://ssrn.com/abstract=2043631 or http://dx.doi.org/10.2139/ssrn.2043631

Richard Sowers (Contact Author)

University of Illinois at Urbana-Champaign - Department of Mathematics ( email )

1409 W. Green St.
Urbana, IL 61801
United States

HOME PAGE: http://www.math.uiuc.edu/~r-sowers/

Xiao Li

affiliation not provided to SSRN ( email )

Michael D. Lipkin

Columbia University ( email )

331 S.W. Mudd Building
500 West 120th Street
New York, NY 10027
United States

Katama Trading, LLC ( email )

American Stock Exchange
2 Rector Street
New York, NY 10006
United States

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