Asset pricing with costly short sales
Swiss Finance Institute Research Paper No. 22-21
Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2022
58 Pages Posted: 9 Mar 2022 Last revised: 26 Oct 2022
There are 2 versions of this paper
Asset pricing with costly short sales
Asset Pricing with Costly Short Sales
Date Written: March 7, 2022
Abstract
We study a dynamic general equilibrium model with costly-to-short stocks and heterogeneous beliefs. Costly short sales drive a wedge between the valuation of assets that promise identical cash flows but are subject to different trading arrangements. Specifically, we show that the price of an asset is given by the risk-adjusted present value of future cash flows which include both dividends and an endogenous lending yield. Once returns are appropriately adjusted for lending fees, stocks with low and high shorting costs offer similar risk-return tradeoffs, shedding light on recent findings about their explanatory power in the cross-section of returns.
Keywords: Shorting fees, Securities lending, Heterogeneous beliefs, Dynamic equilibrium.
JEL Classification: D51, D52, G11, G12
Suggested Citation: Suggested Citation