Market Efficiency and Limits to Arbitrage: Evidence from the Volkswagen Short Squeeze

88 Pages Posted: 1 Jun 2017 Last revised: 17 Apr 2019

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Marlene Haas

Independent

Eric Nowak

Swiss Finance Institute; University of Lugano

Angel Tengulov

Vanderbilt University - Owen Graduate School of Management

Date Written: April 14, 2019

Abstract

On October 26, 2008, Porsche announced its domination plan for Volkswagen. This disclosure was followed by a short squeeze that briefly made Volkswagen the most valuable listed company in the world. Using these events as a unique experimental setting, we argue that the implementation of securities regulation has not been effective in Germany. Using hand-collected and high-frequency data we provide the first detailed academic study of the Porsche-VW short squeeze and show that it significantly impeded price discovery and market efficiency. This is important because without efficient securities markets, projects such as the EU's Capital Markets Union cannot be successful.

Keywords: Limits to arbitrage, short selling, stock cornering

JEL Classification: G14, G28, G32

Suggested Citation

Allen, Franklin and Haas, Marlene and Nowak, Eric and Tengulov, Angel, Market Efficiency and Limits to Arbitrage: Evidence from the Volkswagen Short Squeeze (April 14, 2019). Swiss Finance Institute Research Paper No. 17-64. Available at SSRN: https://ssrn.com/abstract=2977019 or http://dx.doi.org/10.2139/ssrn.2977019

Franklin Allen

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Marlene Haas

Independent

No Address Available

Eric Nowak (Contact Author)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Lugano ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland
+41-91-9124-637 (secr. -712) (Phone)
+41-91-9124-647 (Fax)

Angel Tengulov

Vanderbilt University - Owen Graduate School of Management ( email )

401 21st Avenue South
Nashville, TN 37203
United States

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