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

See all articles by Dmitriy Muravyev

Dmitriy Muravyev

Michigan State University - Department of Finance

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance

Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: April 29, 2016

Abstract

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

Muravyev, Dmitriy and Pearson, Neil D. and Pollet, Joshua Matthew, Is There a Risk Premium in the Stock Lending Market? Evidence from Equity Options (April 29, 2016). Available at SSRN: https://ssrn.com/abstract=2799315 or http://dx.doi.org/10.2139/ssrn.2799315

Dmitriy Muravyev

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

Neil D. Pearson (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0490 (Phone)
217-244-9867 (Fax)

Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 344-4311 (Phone)

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