Borrowing Fees and Expected Stock Returns

Abstract

Borrowing fees set in the securities lending market contain reliable information about the cross section of short-term expected stock returns. Using securities lending data for 14 developed and emerging markets from 2011 to 2018, we find that stocks with high borrowing fees tend to underperform their peers over the short term. Moreover, stocks that remain expensive to borrow continue to underperform, but persistence of high borrowing fees is not systematically predictable. While the information in borrowing fees is fast decaying, it can still be efficiently incorporated into real-world equity portfolios.

Keywords: securities lending, short selling, short interest, expected return, rebate rates

JEL Classification: G12, G14, G15