Understanding Returns to Short Selling Using Option-Implied Stock Borrowing Fees

72 Pages Posted: 13 Oct 2016 Last revised: 17 Oct 2018

See all articles by Dmitriy Muravyev

Dmitriy Muravyev

Boston College - 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 20, 2018

Abstract

Measures of short sale constraints and short selling activity strongly predict stock returns. This apparently exploitable predictability is difficult to explain. We partially resolve this puzzle by using measures of the stock borrowing costs paid by short-sellers. We show in portfolio sorts that the returns to short selling, net of stock borrowing costs, are much smaller than the gross returns to shorting or a typical long-short strategy. Option-implied borrowing fees, which reflect option market makers’ borrowing costs and the risks of changes in those costs, are on average only slightly higher than quoted borrowing fees. This finding indicates that the risk of changes in borrowing fee does not command a substantial risk premium. Option-implied borrowing fees predict future fees and stock returns, including returns net of quoted borrowing costs. The option-implied fee drives out other return predictors in panel regressions including option-based variables and other measures of short selling activity.

Keywords: Short sales, stock borrowing fee, stock lending fee, equity options

JEL Classification: G12, G13, G14

Suggested Citation

Muravyev, Dmitriy and Pearson, Neil D. and Pollet, Joshua Matthew, Understanding Returns to Short Selling Using Option-Implied Stock Borrowing Fees (April 20, 2018). Available at SSRN: https://ssrn.com/abstract=2851560 or http://dx.doi.org/10.2139/ssrn.2851560

Dmitriy Muravyev (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
2177213772 (Phone)

HOME PAGE: http://www2.bc.edu/dmitriy-muravyev/

Neil D. Pearson

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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