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The Cost of Short-Selling Liquid SecuritiesSnehal BanerjeeNorthwestern University - Kellogg School of Management - Department of Finance Jeremy J. GravelineUniversity of Minnesota - Carlson School of Management September 9, 2011 Journal of Finance, Forthcoming Abstract: Standard models of liquidity argue that the higher price for a liquid security reflects the future benefits that long investors expect to receive. We show that short-sellers can also pay a net liquidity premium, if their cost to borrow the security is higher than the price premium they collect from selling it. We provide a model-free decomposition of the price premium for liquid securities into the net premiums paid by both long investors and short- sellers. Empirically, we find that short-sellers were responsible for a substantial fraction of the liquidity premium for on-the-run Treasuries from November 1995 through July 2009.
Number of Pages in PDF File: 35 Keywords: On The Run Treasuries, Short Selling, Liquidity JEL Classification: G12 Accepted Paper SeriesDate posted: March 13, 2009 ; Last revised: September 10, 2011Suggested CitationContact Information
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