Securities lending and information transmission: a model of endogenous short-sale constraints
64 Pages Posted: 25 Aug 2020 Last revised: 28 Nov 2020
Date Written: August 23, 2020
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: Suggested Citation