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

57 Pages Posted: 23 Jun 2016 Last revised: 15 May 2021

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; Canadian Derivatives Institute

Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: April 22, 2021

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

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 22, 2021). Journal of Finance, Forthcoming, 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)

Canadian Derivatives Institute ( email )

3000, chemin de la Côte-Sainte-Catherine
Montréal, Québec H3T 2A7
Canada

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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