Securities Lending and Trading by Active and Passive Funds

63 Pages Posted: 15 Oct 2020 Last revised: 19 Oct 2023

See all articles by Pekka Honkanen

Pekka Honkanen

University of Georgia - Terry College of Business

Date Written: January 1, 2020

Abstract

U.S. mutual funds that participate in the securities lending market extract information from stock borrowing. Active mutual funds exploit this information for trading by rebalancing their portfolios away from borrowed stocks, whereas passive funds do not. This trading avoids capital losses on borrowed stocks, whose prices tend to decrease. Active funds also trade more aggressively on stocks with more negative future returns, suggesting that they are able to identify informed borrowing. Finally, passive funds charge higher lending fees than active funds, which is consistent with short sellers paying a premium to lenders with lower recall risk.

Keywords: Securities lending, short selling, mutual funds

JEL Classification: G11, G12, G14

Suggested Citation

Honkanen, Pekka, Securities Lending and Trading by Active and Passive Funds (January 1, 2020). HEC Paris Research Paper No. FIN-2020-1390, Available at SSRN: https://ssrn.com/abstract=3679808 or http://dx.doi.org/10.2139/ssrn.3679808

Pekka Honkanen (Contact Author)

University of Georgia - Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States

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