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Could Short Selling Make Financial Markets Tumble?

Author

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  • JØRGEN VITTING ANDERSEN

    (U. F. R. de Sciences Économiques, Gestion, Mathématiques et Informatique, CNRS UMR7536 and Université Paris X-Nanterre, 92001 Nanterre Cedex, France;
    Laboratoire de Physique de la Matière Condensée, CNRS UMR6622 and Université de Nice-Sophia Antipolis, 06108 Nice Cedex 2, France)

Abstract

It is suggested to consider long term trends of financial markets as a growth phenomenon. The question is what conditions are needed for a long term sustainable growth or contraction in a financial market? The paper discusses the role of traditional market players of long only mutual funds versus hedge funds which take both short and long positions. It will be argued that financial markets since their very origins and only till very recently, have been in a state of "broken symmetry" which favored long term growth instead of contraction. The reason for this "broken symmetry" in a long term "bull phase" is the historical almost complete dominance by long only players in financial markets. Only with the recent arrival of investors that take up short positions is the symmetry slowly being restored, with the implications, as will be argued, of an increased probability for lasting decline of the markets, i.e., appearance of a long term "bear phase". Recent short trade data of the Nasdaq Composite index show an increase in the short activity prior to or at the same time as dips in the market, and reveal an steady increase in short trading activity, reaching levels never seen before.

Suggested Citation

  • Jørgen Vitting Andersen, 2005. "Could Short Selling Make Financial Markets Tumble?," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(04), pages 509-521.
    • Handle: RePEc:wsi:ijtafx:v:08:y:2005:i:04:n:s021902490500313x
    DOI: 10.1142/S021902490500313X
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    References listed on IDEAS

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    1. Challet, Damien & Zhang, Yi-Cheng, 1998. "On the minority game: Analytical and numerical studies," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 256(3), pages 514-532.
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    Cited by:

    1. Jørgen Vitting Andersen & Andrzej Nowak, 2020. "Symmetry and financial Markets," Post-Print halshs-03048686, HAL.
    2. Magda Roszczynska-Kurasinska & Andrzej Nowak & Daniel Kamieniarz & Sorin Solomon & Jørgen Vitting Andersen, 2012. "Short and Long Term Investor Synchronization Caused by Decoupling," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00853991, HAL.
    3. Magda Roszczynska-Kurasinska & Andrzej Nowak & Daniel Kamieniarz & Sorin Solomon & Jørgen Vitting Andersen, 2012. "Short and Long Term Investor Synchronization Caused by Decoupling," PLOS ONE, Public Library of Science, vol. 7(12), pages 1-8, December.

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