48 Pages Posted: 27 Nov 2012 Last revised: 26 Aug 2016
Date Written: August 26, 2016
Deleveraging risk is the risk attributable to investing in a security held by levered investors. When there is an aggregate negative shock to the availability of funding capital, securities with a greater presence of levered investors experience extreme return realizations as these investors unwind their positions. Using data on equity loans as a proxy for the degree of levered positions in a given stock, we find robust evidence of deleveraging risk. Stocks with a high degree of short selling experience large positive returns and a decrease in short selling around periods of funding capital scarcity.
Keywords: Deleveraging, equity lending, short selling, arbitrage capital, funding capital
JEL Classification: G12, G14, G15
Suggested Citation: Suggested Citation
Richardson, Scott A. and Saffi, Pedro A. C. and Sigurdsson, Kari, Deleveraging Risk (August 26, 2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2180785 or http://dx.doi.org/10.2139/ssrn.2180785
By Andrew Ang