Tuesday, January 20, 2015

A Couple Papers About the Inefficient Market in Stock Lending


  1. "Market prices would be more accurate if it was easier (and cheaper) to borrow shares to sell short."
  2. "The stock lending market is too opaque, borrowing costs are too high, leading to not enough stock being shorted and prices being less accurate than they should be. However, short selling is 'bad,' so there is no political pressure to clean up the stock lending market."
Two papers worth mentioning,
  • "Securities Lending, Shorting, and Pricing": "The prospect of lending fees may push the initial price of a security above even the most optimistic buyer’s valuation of the security’s future dividends. A higher price can thus be obtained with some shorting than if shorting is disallowed."
  • "A Dynamic Model for Hard-to-Borrow Stocks": "Consequences of our model for dynamics are elevated volatilities, sharp price spikes and occasional crashes followed by often dramatically lower hard-to- borrowness."

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