The Cost of Short-Selling Liquid Securities
Kellogg School of Management - Department of Finance
Jeremy J. Graveline
University of Minnesota - Carlson School of Management
September 9, 2011
Journal of Finance, Forthcoming
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
Date posted: March 13, 2009 ; Last revised: September 10, 2011
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