Predatory Short Selling

Review of Finance (2014), 18(6): 2153-2195

Columbia Business School Research Paper No. 13-29

34 Pages Posted: 10 Apr 2013 Last revised: 10 Dec 2015

See all articles by Markus K. Brunnermeier

Markus K. Brunnermeier

Princeton University - Department of Economics

Martin Oehmke

London School of Economics & Political Science (LSE) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 21, 2013

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

Keywords: short selling, predatory trading, financial institutions, leverage constraints

JEL Classification: G01, G20, G21, G23, G28

Suggested Citation

Brunnermeier, Markus Konrad and Oehmke, Martin, Predatory Short Selling (August 21, 2013). Review of Finance (2014), 18(6): 2153-2195; Columbia Business School Research Paper No. 13-29. Available at SSRN: https://ssrn.com/abstract=2244511 or http://dx.doi.org/10.2139/ssrn.2244511

Markus Konrad Brunnermeier

Princeton University - Department of Economics ( email )

Bendheim Center for Finance
Princeton, NJ
United States
609-258-4050 (Phone)
609-258-0771 (Fax)

HOME PAGE: http://www.princeton.edu/¡­markus

Martin Oehmke (Contact Author)

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

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