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Market efficiency and limits to arbitrage: Evidence from the Volkswagen short squeeze

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  • Allen, Franklin
  • Haas, Marlene D.
  • Nowak, Eric
  • Tengulov, Angel

Abstract

On October 26, 2008, Porsche announced a largely unexpected domination plan for Volkswagen. The resulting short squeeze in Volkswagen’s stock briefly made it the most valuable listed company in the world. We argue that this was a manipulation designed to save Porsche from insolvency and the German laws against this kind of abuse were not effectively enforced. Using hand-collected data we provide the first rigorous academic study of the Porsche-VW squeeze and show that it significantly impeded market efficiency. Preventing manipulation is important because without efficient securities markets, the EU’s major project of the Capital Markets Union cannot be successful.

Suggested Citation

  • Allen, Franklin & Haas, Marlene D. & Nowak, Eric & Tengulov, Angel, 2021. "Market efficiency and limits to arbitrage: Evidence from the Volkswagen short squeeze," Journal of Financial Economics, Elsevier, vol. 142(1), pages 166-194.
    • Handle: RePEc:eee:jfinec:v:142:y:2021:i:1:p:166-194
    DOI: 10.1016/j.jfineco.2021.05.015
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    More about this item

    Keywords

    Limits to arbitrage; Short selling; Stock cornering; Disclosure and securities regulation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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