Private Information, Securities Lending, and Asset Prices
45 Pages Posted: 30 Jul 2018 Last revised: 31 Jul 2018
Date Written: June 5, 2018
We analyze the role of private information in the equity loan market in a rational–expectations model with endogenous short–sale constraints. We show that when a group of investors is inhibited from participating in the equity loan market, excess demand for short selling, driven by either privately informed investors or liquidity traders, allows equity lenders to charge a fee for lending their shares. We show that information asymmetry among investors, arising from private information, reduces the expected lending fee; reduces short–selling risk, measured by the volatility of the lending fee; and has an ambiguous effect on the expected return.
Keywords: Short Selling, Asset Prices, Equity Lending Fees, Information Asymmetry
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation