Securities lending and information transmission: a model of endogenous short-sale constraints

64 Pages Posted: 25 Aug 2020 Last revised: 28 Nov 2020

See all articles by Andrey Pankratov

Andrey Pankratov

University of Lugano; Swiss Finance Institute

Date Written: August 23, 2020

Abstract

I study short-sale constraints in a market with asymmetric information. I offer a novel approach endogenizing short-sale constraints by including an asset-borrowing market in my model. Short-sellers have to borrow an asset and therefore reveal information to a lender. The lender trades on her own account in addition to charging fees, which motivates the short-seller to hide the information and hinders short sales. I contribute to the literature by modeling the mechanism behind short-selling in the absence of explicit short-selling restrictions that are currently less relevant in practice. The model has new implications for profit distribution, market efficiency, and volatility.

Keywords: Security lenders, Short interest, Information leakages, Distribution of profits, Short-sale constraints, Market efficiency

JEL Classification: G11, G12, G14

Suggested Citation

Pankratov, Andrey, Securities lending and information transmission: a model of endogenous short-sale constraints (August 23, 2020). Swiss Finance Institute Research Paper No. 20-69, Available at SSRN: https://ssrn.com/abstract=3680016 or http://dx.doi.org/10.2139/ssrn.3680016

Andrey Pankratov (Contact Author)

University of Lugano ( email )

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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