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Predatory short selling

Brunnermeier, Markus K. and Oehmke, Martin (2014) Predatory short selling. Review of Finance, 18 (6). pp. 2153-2195. ISSN 1572-3097

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Identification Number: 10.1093/rof/rft043

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.

Item Type: Article
Official URL: https://academic.oup.com/rof
Additional Information: © 2013 Oxford University Press
Divisions: Finance
Subjects: H Social Sciences > HG Finance
Sets: Departments > Finance
Date Deposited: 10 Oct 2017 07:30
Last Modified: 20 Jun 2020 01:56
URI: http://eprints.lse.ac.uk/id/eprint/84517

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