A Long and a Short Leg Make for a Wobbly Equilibrium
Nicolae Gârleanu, Stavros Panageas, Geoffery Zheng
American Economic Review · 2026 · Volume 116 · Issue 4
Abstract
We provide a model to explain how the interaction between the spot and lending markets for stocks can lead to abrupt changes in short selling activity. Furthermore, rational short sellers may choose to abandon the market even as mispricing widens. We document empirically that the dynamics of short selling are fat tailed and subject to abrupt changes, especially for the stocks that the model identifies as susceptible to such dynamics.
Keywords
Portfolio Choice, Investment Decisions, Asset Pricing, Trading Volume, Bond Interest Rates, Information and Market Efficiency, Event Studies, Insider Trading, Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets [Neurofinance]
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