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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26676
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| Title: | Are Financial Market Corners and Short Squeezes Inefficient |
| Authors: | Nagarajan, S. |
| Issue Date: | 1997 |
| Series/Report no.: | FIN-97-005 |
| Abstract: | This paper rigorously examines the prevalent belief that financial
market corners and short squeezes reduce trading efficiency, especially
when traders are privately informed. Explicit welfare criteria are
proposed, and a trading model based on direct revelation mechanism
design methodology is developed. It is shown that market corners and
short squeezes are not per se inconsistent with trading efficiency if
traders are sufficiently risk-averse. An impossibility theorem is then
proved: The risk-aversion levels that give rise to corners in the first
place can never be large enough to achieve efficiency starting from
those corners. Increasing the supply of the traded security can restore
efficiency, while neither limiting the short positions nor preventing
the cornerer from squeezing the shorts improves trading welfare. These
results hold for any set of prior beliefs, and for any trading game that
shares the same preferences and information structure – direct or
indirect, extensive-form or normal-form, with or without trading frictions. |
| URI: | http://hdl.handle.net/2451/26676 |
| Appears in Collections: | Finance Working Papers
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