Dynamic equilibrium with costly short-selling and lending market

Atmaz, A, Basak, S and Ruan, F (2024) Dynamic equilibrium with costly short-selling and lending market. Review of Financial Studies, 37 (2). pp. 444-506. ISSN 0893-9454

Abstract

We develop a dynamic model of costly stock short-selling and lending market and obtain implications that simultaneously support many empirical regularities related to short-selling. In our model, investors’ belief disagreement leads to shorting demand, whereby short-sellers pay shorting fees to borrow stocks from lenders. Our main novel results are as follows. Short interest is positively related to shorting fee and predicts stock returns negatively. Higher short-selling risk can be associated with lower stock returns and less short-selling activity. Stock volatility is increased under costly short-selling. An application to GameStop episode yields implications consistent with observed patterns.

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Item Type: Article
Subject Areas: Finance
Additional Information:

© The Author(s) 2023. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved.

This is a pre-copyedited, author-produced version of an article accepted for publication in Review of Financial Studies following peer review. The version of record: 'Dynamic equilibrium with costly short-selling and lending market', Review of Financial Studies is available online at: https://doi.org/10.1093/rfs/hhad060

Date Deposited: 24 Aug 2023 12:54
Date of first compliant deposit: 26 Jun 2023
Subjects: Investment appraisal
Investment theory
Risk
Last Modified: 31 Jan 2024 06:20
URI: https://lbsresearch.london.edu/id/eprint/2933
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