Securities Lending and Trading by Active and Passive Funds

Journal of Financial and Quantitative Analysis (forthcoming)

HEC Paris Research Paper No. FIN-2020-1390

63 Pages Posted: 15 Oct 2020 Last revised: 26 Sep 2024

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 funds exploit this information, rebalancing away from borrowed stocks whose prices tend to decrease, whereas passive funds do not. Information spillovers within fund families are stronger when the lender is a passive fund and when the family is more cooperative (less competitive). Active funds 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, consistent with short sellers paying a premium to 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). Journal of Financial and Quantitative Analysis (forthcoming), 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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