Short Squeeze Uncertainty and Skewness

 with Ilias Filippou and Fernando Zapatero.

Abstract:

Short squeezes often lead to sudden, large increases in stock prices. We show that uncertainty about the likelihood of a short squeeze is a proxy for skewness-seeking investors, and they use call options in their quest. In particular, these investors are willing to pay a premium for the upside potential of these lottery-like securities, as is the case for other lottery-like securities identified in the literature. In addition, high short squeeze uncertainty causes deviations from the put–call parity condition in the direction dictated by the overpricing of the call options.

Keywords:  Short Squeeze, Anomalies, Limits to Arbitrage

JEL Classification: G11, G12, G14, G32