Analyzing the statistical significance and potential impact of abnormal returns caused by a short squeeze

The aim of this master’s thesis is to study if a short squeeze event can have a significant long-term impact on the abnormal returns of companies. Due to the extremely short term but exponential price spike during a short squeeze we first establish that these short-term returns are significant. We then look at returns on a longer term to establish whether there are significant abnormal returns using the event case methodology and a generalized rank test developed by Kolari & Pynnonen (2011). We identified a number of occasions when short squeezes had occurred as defined by IHS Markit and created an estimation window in each case in order to determine the normal expected returns with three different types of conditionings. Using the GRANK test we searched whether the cumulative abnormal returns during two different event windows (6 days, and 120 days after the event) were significantly different from those during the estimation window. It is found that although the initial price spikes are significant, the cumulative abnormal returns in both studies’ event windows are not statistically significant. This implies that any short-term returns disappear as time progresses and that the price relationship between investors and affected securities does not change after a short squeeze.