Is There a Risk Premium in the Stock Lending Market? Evidence from Equity Options

Abstract

Recent research argues that uncertainty about future stock borrowing fees is an impediment to
short-selling and this risk explains the 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 this premium. We find that the risk premium is small. Moreover, if the risk
premium is substantial, then it should be reflected in the returns to short selling stock after
adjusting for the stock borrowing fee. However, borrowing fee risk does not predict the feeadjusted
returns.

Keywords: Short sales, stock borrowing fee, risk premium, equity options

JEL Classification: G12, G13, G14