Shorting in Speculative Markets

59 Pages Posted: 18 May 2017 Last revised: 31 Jul 2019

See all articles by Marcel Nutz

Marcel Nutz

Columbia University

José A. Scheinkman

Columbia University; Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 30, 2019


We propose a continuous-time model of trading with heterogeneous beliefs. Risk-neutral agents face quadratic costs-of-carry on positions and thus their marginal valuations decrease with the size of their position, as it would be the case for risk-averse agents. In the equilibrium models of heterogeneous beliefs that followed Harrison-Kreps, investors are risk-neutral, short-selling is prohibited and agents face constant marginal costs of carrying positions. The resulting resale option guarantees that the price exceeds the price of the asset when speculation is ruled out; the difference is identified as a bubble. In our model increasing marginal costs entail that the price depends on asset supply. Second, agents also value an option to delay, and this may cause the market to equilibrate below the buy-and-hold price. Third, we introduce the possibility of short-selling. A Hamilton–Jacobi–Bellman equation of a novel form quantifies precisely the influence of the costs-of-carry on the price. An unexpected decrease in shorting costs may lead to the collapse of a bubble; this links the financial innovations that facilitated shorting of MBSs to the subsequent collapse of prices.

Keywords: Speculation, Heterogeneous Beliefs, Asset-Supply, Resale Option, Delay Option, Shorting, Bubble-Implosion

JEL Classification: G1, G12, G14, G18

Suggested Citation

Nutz, Marcel and Scheinkman, José, Shorting in Speculative Markets (July 30, 2019). Journal of Finance, Forthcoming, Available at SSRN: or

Marcel Nutz

Columbia University ( email )

José Scheinkman (Contact Author)

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