Dancing to the Same Tune: Commonality in Securities Lending Fees

Abstract

We document the existence of commonality in equity lending fees, and we show that this is an important limit to arbitrage. The common component of loan fees explains a high percentage of loan fee variation, and stocks with high loan fees are highly sensitive to the common component. Loan fee commonality is associated with several asset pricing and macro variables, suggesting loan fee commonality is associated with consequential states of the world. We document a strong relationship between loan fee commonality and both low future returns and decreased price efficiency, suggesting systematic loan fee comovement poses a limit to arbitrage.

Keywords: short selling, commonality, factors, lending fees, loan fees, principal component analysis, PCA

JEL Classification: G12, G14, G19