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Market Efficiency and Limits to Arbitrage: Evidence from the Volkswagen Short Squeeze

Author

Listed:
  • Franklin Allen

    (Imperial College London)

  • Marlene Haas

    (Independent researcher)

  • Eric Nowak

    (University of Lugano and Swiss Finance Institute)

  • Angel Tengulov

    (Independent researcher)

Abstract

On October 26, 2008, Porsche announced its domination plan for Volkswagen. This announcement caused a short squeeze that briefly made Volkswagen the most valuable listed company in the world. Using this event and Germany's regulatory framework as a unique experimental setting, we argue that effective disclosure regulation and enforcement of securities laws are important in modern financial markets. We provide the first forensic academic study of the Porsche-VW squeeze and show that it significantly impeded price discovery and market efficiency. These limits to arbitrage in the form of short sale risks imply significant costs to the arbitrageurs involved.

Suggested Citation

  • Franklin Allen & Marlene Haas & Eric Nowak & Angel Tengulov, 2017. "Market Efficiency and Limits to Arbitrage: Evidence from the Volkswagen Short Squeeze," Swiss Finance Institute Research Paper Series 17-64, Swiss Finance Institute, revised May 2018.
    • Handle: RePEc:chf:rpseri:rp1764
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2977019
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    Cited by:

    1. Pástor, Luboš & Allen, Franklin, 2018. "The Capital Markets Union: Key Challenges," CEPR Discussion Papers 12761, C.E.P.R. Discussion Papers.

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