Market Efficiency and Limits to Arbitrage: Evidence from the Volkswagen Short Squeeze
96 Pages Posted: 1 Jun 2017 Last revised: 18 May 2020
Date Written: April 14, 2019
On October 26, 2008, Porsche announced an unexpected domination plan for Volkswagen. The resulting short squeeze in Volkswagen's stock briefly made it the most valuable listed company in the world. We argue that this was a manipulation designed to save Porsche from an insolvency and the German laws against this kind of abuse were not effectively enforced. Using hand-collected data we provide the first rigorous academic study of the Porsche-VW squeeze and show that it significantly impeded market efficiency. Preventing manipulation is important because without efficient securities markets, the EU's major project of the Capital Markets Union cannot be successful.
Keywords: Limits to arbitrage, short selling, stock cornering, disclosure and securities regulation.
JEL Classification: G14, G28, G32
Suggested Citation: Suggested Citation