A long and a short leg make for a wobbly equilibrium

Author / Creator

Gârleanu, Nicolae B

Available as

Online

Summary

We provide evidence that the online discussion on the WSB subreddit had a substantial negative impact on the profitability of shorting strategies across a number of stocks -- even those that were n...

We provide evidence that the online discussion on the WSB subreddit had a substantial negative impact on the profitability of shorting strategies across a number of stocks -- even those that were neither heavily discussed on the subreddit, nor experienced an unusual increase in retail buying volume. We provide a model to explain how fears among short sellers can become self-fulfilling. In the model, the market for shares and the lending market must clear jointly. Despite standard assumptions, the model features multiple equilibria and "run-type'' behavior by shorting agents. More broadly, the model provides a tractable framework to interpret several empirical observations on the relation between short interest, lending fees, and expected returns.

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