Short Squeezes and Their Consequences

47 Pages Posted: 9 Feb 2022 Last revised: 13 Jul 2022

Date Written: February 3, 2022

Abstract

A short squeeze occurs if borrowed shares are recalled and the short seller is unable to find another source of shares. This forces the short seller to terminate a position early. For most stocks the probability of a short squeeze is very low. Short squeezes, however, are not unusual for the hardest to borrow stocks. For these stocks, trading costs from squeezes are high, and have a significant impact on the returns to short selling. For hard-to-borrow stocks, short sellers also miss out on significant abnormal returns because squeezes force them to close positions.

Keywords: short squeeze, short selling, arbitrage

JEL Classification: G11, G12, g14

Suggested Citation

Schultz, Paul, Short Squeezes and Their Consequences (February 3, 2022). Available at SSRN: https://ssrn.com/abstract=4025226 or http://dx.doi.org/10.2139/ssrn.4025226

Paul Schultz (Contact Author)

University of Notre Dame ( email )

361 Mendoza College of Business
Notre Dame, IN 46556-5646
United States

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