Squeezing the Bears: Cornering Risk and Limits on Arbitrage during the ‘British Bicycle Mania’, 1896-1898

Research output: Contribution to journalArticle

Abstract

This article examines the extent to which Victorian investors were short‐sale constrained. While previous research suggests that there were relatively few limits on arbitrage, this article argues that short‐sales of stocks outside the Official List were indirectly constrained by the risk of being cornered. Evidence for this hypothesis comes from three corners in cycle company shares which occurred in 1896–7, two of which resulted in substantial losses for short‐sellers. Legal efforts to retrieve funds lost in a corner were unsuccessful, and the court proceedings reveal a widespread contempt for short‐sellers, or ‘bears’, among the general public. Consistent with the hypothesis that these episodes affected the market, this study's findings show that cycle companies for which cornering risk was greater experienced disproportionately lower returns during a subsequent crash in the market for cycle shares. This evidence suggests that, under certain circumstances, short‐selling shares in Britain prior to 1900 could have been much riskier than previously thought.
Original languageEnglish
Pages (from-to)1286-1311
Number of pages16
JournalEconomic History Review
Volume72
Issue number4
Early online date29 Jan 2019
DOIs
Publication statusPublished - Nov 2019

Fingerprint Dive into the research topics of 'Squeezing the Bears: Cornering Risk and Limits on Arbitrage during the ‘British Bicycle Mania’, 1896-1898'. Together they form a unique fingerprint.

Cite this