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Securities Lending, Shorting, and Pricing

Posted: 29 Mar 2002  

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Nicolae Garleanu

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

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Abstract

We present a model of asset valuation in which short-selling is achieved by searching for security lenders and by bargaining over the terms of the lending fee. If lendable securities are difficult to locate, then the price of the security is initially elevated, and expected to decline over time. This price decline is to be anticipated, for example, after an initial public offering (IPO), among other cases, and is increasing in the degree of heterogeneity of beliefs of investors about the likely future value of the security. The prospect of lending fees may push the initial price of a security above even the most optimistic buyer's valuation of the security's future dividends. A higher price can thus be obtained with some shorting than if shorting is disallowed.

Suggested Citation

Duffie, Darrell and Garleanu, Nicolae and Pedersen, Lasse Heje, Securities Lending, Shorting, and Pricing. Journal of Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=304920

James Darrell Duffie

Stanford University - Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Nicolae Bogdan Garleanu

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

HOME PAGE: http://faculty.haas.berkeley.edu/garleanu

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Lasse Heje Pedersen (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

New York University (NYU) ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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