The Cost of Short-Selling Liquid Securities

35 Pages Posted: 13 Mar 2009 Last revised: 10 Sep 2011

Snehal Banerjee

University of California, San Diego (UCSD) - Rady School of Management

Jeremy J. Graveline

University of Minnesota - Carlson School of Management

Date Written: September 9, 2011

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.

Keywords: On The Run Treasuries, Short Selling, Liquidity

JEL Classification: G12

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

Snehal Banerjee (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Jeremy J. Graveline

University of Minnesota - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-626-7817 (Phone)

HOME PAGE: http://www.tc.umn.edu/~jeremy/

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