Dancing to the Same Tune: Commonality in Securities Lending Fees

82 Pages Posted: 27 Oct 2020 Last revised: 30 Jan 2024

See all articles by Spencer Andrews

Spencer Andrews

Office of Financial Research, U.S. Department of the Treasury

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School; Frank Hawkins Kenan Institute of Private Enterprise

Adam V. Reed

University of North Carolina Kenan-Flagler Business School

Date Written: September 1, 2020

Abstract

We document the existence of commonality in equity lending fees, and we show that this is an important limit to arbitrage. The common component of loan fees explains a high percentage of loan fee variation, and stocks with high loan fees are highly sensitive to the common component. Loan fee commonality is associated with several asset pricing and macro variables, suggesting loan fee commonality is associated with consequential states of the world. We document a strong relationship between loan fee commonality and both low future returns and decreased price efficiency, suggesting systematic loan fee comovement poses a limit to arbitrage.

Keywords: short selling, commonality, factors, lending fees, loan fees, principal component analysis, PCA

JEL Classification: G12, G14, G19

Suggested Citation

Andrews, Spencer and Lundblad, Christian T. and Reed, Adam V., Dancing to the Same Tune: Commonality in Securities Lending Fees (September 1, 2020). Available at SSRN: https://ssrn.com/abstract=3690337 or http://dx.doi.org/10.2139/ssrn.3690337

Spencer Andrews (Contact Author)

Office of Financial Research, U.S. Department of the Treasury ( email )

717 14th St NW
Washington, DC 20005
United States
3026502645 (Phone)

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

Frank Hawkins Kenan Institute of Private Enterprise ( email )

Campus Box 3440, The Kenan Center
Chapel Hill, NC 27599-344
United States

Adam V. Reed

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

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