Short Squeeze Uncertainty and Skewness

Abstract

Short squeezes often lead to sudden, large increases in stock prices. Using a novel measure of the likelihood of short squeezes we show that uncertainty about the probability of a short squeeze is a proxy for right-skewness –characteristic of lotteries– and used by skewness-seeking investors, who favor call options in their quest. In particular, these investors are willing to pay a premium for the upside potential of these lottery-like securities, as it is the case for other lottery-like securities identified in the literature.

Keywords: Short Squeeze, Anomalies, limits to arbitrage

JEL Classification: G11, G12, G14, G32