The Shorting Premium and Asset Pricing Anomalies

56 Pages Posted: 24 Jul 2014  

Itamar Drechsler

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Qingyi (Freda) Song Drechsler

University of Pennsylvania - Wharton Research Data Services

Multiple version iconThere are 2 versions of this paper

Date Written: July 2014

Abstract

Short-rebate fees are a strong predictor of the cross-section of stock returns, both gross and net of fees. We document a large "shorting premium": the cheap-minus-expensive-to-short (CME) portfolio of stocks has a monthly average gross return of 1.43%, a net return of 0.91%, and a 1.53% four-factor alpha. We show that short fees interact strongly with the returns to eight of the largest and most well-known cross-sectional anomalies. The anomalies effectively disappear within the 80% of stocks that have low short fees, but are greatly amplified among those with high fees. We propose a joint explanation for these findings: the shorting premium is compensation for the concentrated short risk borne by the small fraction of investors who do most shorting. Because it is on the short side, it raises prices rather than lowers them. We proxy for this short risk using the CME portfolio return and demonstrate that a Fama-French + CME factor model largely captures the anomaly returns among both high- and low-fee stocks.

Suggested Citation

Drechsler, Itamar and Drechsler, Qingyi (Freda) Song, The Shorting Premium and Asset Pricing Anomalies (July 2014). NBER Working Paper No. w20282. Available at SSRN: https://ssrn.com/abstract=2471175

Itamar Drechsler (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Qingyi (Freda) Song Drechsler

University of Pennsylvania - Wharton Research Data Services ( email )

3819 Chestnut St Suite 300A
St Leonard's Court
Philadelphia, PA 19104
United States

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