The Interaction between Security Lending Market and Security Trading Market

41 Pages Posted: 4 Aug 2014 Last revised: 13 Jun 2016

See all articles by Tiandu Wang

Tiandu Wang

The People's Bank of China (PBC) - Shanghai Head Office

Chenghu Ma

Fudan University - School of Management

Qian Sun

Fudan University

Date Written: December 1, 2012

Abstract

We develop a simple model to address the interaction between security lending market and security trading market. Whether a security is hard to borrow or not results in two different scenarios of the interaction process. When a security is easy to borrow, short-selling leads to a lower spot price. When a security is hard to borrow, any CHANGE in shorting supply/demand should be largely absorbed by the lending market, and thus have minimal impact on the spot price. We identify three types of market segmentation that contribute to the observed small aggregate short interest and positive lending fee. A positive lending fee implies that the negative opinion of short sellers is offset by the opposite view of security lenders, leaving the equilibrium security price that reflects only the perception of those who neither lend nor short. We further perform static analyses of the change in the scope of the short-selling prohibition, the population mass of potential lenders, the degree of heterogeneity in beliefs, institutional ownership, and margin requirement. The analytical results derived from this model are potentially useful for resolving the debate on the impact of short-selling on security price.

Keywords: Short-selling, Security lending, Market segmentation

JEL Classification: G12, G14

Suggested Citation

Wang, Tiandu and Ma, Chenghu and Sun, Qian, The Interaction between Security Lending Market and Security Trading Market (December 1, 2012). First Annual Volatility Institute at NYU Shanghai (VINS) Conference - 2015, Available at SSRN: https://ssrn.com/abstract=2430788 or http://dx.doi.org/10.2139/ssrn.2430788

Tiandu Wang (Contact Author)

The People's Bank of China (PBC) - Shanghai Head Office ( email )

181 East Lujiazui Road
Shanghai, 200120
China

Chenghu Ma

Fudan University - School of Management ( email )

No. 670, Guoshun Road
Shanghai, 200433
China

Qian Sun

Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China
86 21 25011094 (Phone)

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