Predatory Short Selling
Review of Finance (2014), 18(6): 2153-2195
34 Pages Posted: 10 Apr 2013 Last revised: 10 Dec 2015
There are 2 versions of this paper
Predatory Short Selling
Predatory Short Selling
Date Written: August 21, 2013
Abstract
Financial institutions may be vulnerable to predatory short selling. When the stock of a financial institution is shorted aggressively, leverage constraints imposed by short-term creditors can force the institution to liquidate long-term investments at fire sale prices. For financial institutions that are sufficiently close to their leverage constraints, predatory short selling equilibria co-exist with no-liquidation equilibria (the vulnerability region), or may even be the unique equilibrium outcome (the doomed region). Increased coordination among short sellers expands the doomed region, where liquidation is the unique equilibrium. Our model provides a potential justification for temporary restrictions of short selling for vulnerable institutions and can be used to assess recent empirical evidence on short-sale bans.
Keywords: short selling, predatory trading, financial institutions, leverage constraints
JEL Classification: G01, G20, G21, G23, G28
Suggested Citation: Suggested Citation
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