Detecting the great short squeeze on Volkswagen

On 28 October 2008 a short squeeze on Volkswagen stock propelled this car maker to become the world's most valuable company for a day. I study the market behavior empirically and investigate whether the timing of the price spike could have been anticipated from earlier trading. I utilize price...

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Bibliographic Details
Published inPacific-Basin finance journal Vol. 40; pp. 323 - 334
Main Author Godfrey, Keith R.L.
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.12.2016
Subjects
Law of one price
Limits to arbitrage
Porsche
Regional variation
Short squeeze
Volkswagen
D43
Short squeeze
Volkswagen
Porsche
Law of one price
G12
Regional variation
G17
D81
Limits to arbitrage
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Summary:On 28 October 2008 a short squeeze on Volkswagen stock propelled this car maker to become the world's most valuable company for a day. I study the market behavior empirically and investigate whether the timing of the price spike could have been anticipated from earlier trading. I utilize price information from regional stock exchanges in parallel with the primary electronic trading platform Xetra. Although the trading volume on the seven regional exchanges is small, the geographical variation in traded prices shows anomalies when the law of supply and demand begins to overrule the law of one price, and this is observed more than 24h ahead of the price peak. I find that the coefficient of variation in the prices at the regional exchanges is a leading indicator of the Volkswagen price spike. •Price variation from regional stock exchanges can help detect a short squeeze.•A short squeeze in 2008 caused geographic variation in Volkswagen's stock price.•Quantitative analysis provides 24h warning of the Volkswagen price spike.•Smaller stock exchanges can add information during unusual market conditions.
ISSN:0927-538X
1879-0585
DOI:10.1016/j.pacfin.2016.02.001