35 Pages Posted: 13 Mar 2009 Last revised: 10 Sep 2011
Date Written: September 9, 2011
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.
Keywords: On The Run Treasuries, Short Selling, Liquidity
JEL Classification: G12
Suggested Citation: Suggested Citation
Banerjee, Snehal and Graveline, Jeremy J., The Cost of Short-Selling Liquid Securities (September 9, 2011). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1358590