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Lesson 10iReaducetPrledatory Short-selling

  • Short-selling is important to avoid bubbles (Note: shorting is impossible in housing market)

  • Problem: Predatory short selling at times of crisis

    • Sell stocks short to induce liquidity spiral (modern run)

    • Fire-sales reduce fundamental value, which makes

shorting profitable

  • Most pronounced for financial firms

Prohibit shorts at times of crisis, for stocks with severe maturity mismatch

  • Caution: more maturity mismatch in the future!

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