Is There a Risk Premium in the Stock Lending Market? Evidence from Equity Options
49 Pages Posted: 23 Jun 2016 Last revised: 22 Oct 2019
Date Written: April 29, 2016
Recent research argues that uncertainty about future stock borrowing fees is an impediment to short-selling and it explains the risk-adjusted performance of short strategies. One possible mechanism is that borrowing fee risk carries a risk premium. Since the present value of the uncertain borrowing fee is reflected in options prices, the difference between option-implied and realized fees estimates the risk premium. Overall the risk premium is small, but it is material during the financial crisis and for stocks affected by the short sale ban. Option-implied borrowing fees predict stock returns in panel regressions and drive out other shorting proxies.
Keywords: Short sales, stock borrowing fee, risk premium, equity options
JEL Classification: G12, G13, G14
Suggested Citation: Suggested Citation