Deleveraging risk

Richardson, S A, Saffi, P A C and Sigurdsson, K (2017) Deleveraging risk. Journal of Financial and Quantitative Analysis, 52 (6). pp. 2491-2522. ISSN 0022-1090

Abstract

Deleveraging risk is the risk attributable to investing in a security held by levered investors. When there is an aggregate negative shock to the availability of funding capital, securities with a greater presence of levered investors experience extreme return realizations as these investors unwind their positions. Using data on equity loans as a proxy for the degree of levered positions in a given stock, we find robust evidence of deleveraging risk. Stocks with a high degree of short selling experience large positive returns and a decrease in short selling around periods of funding capital scarcity.