Asset pricing with costly short sales

58 Pages Posted: 9 Mar 2022 Last revised: 26 Oct 2022

See all articles by Theodoros Evgeniou

Theodoros Evgeniou

INSEAD

Julien Hugonnier

Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Rodolfo Prieto

INSEAD

Multiple version iconThere are 2 versions of this paper

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

Evgeniou, Theodoros and Hugonnier, Julien and Prieto, Rodolfo, Asset pricing with costly short sales (March 7, 2022). Swiss Finance Institute Research Paper No. 22-21, Available at SSRN: https://ssrn.com/abstract=4052591 or http://dx.doi.org/10.2139/ssrn.4052591

Theodoros Evgeniou

INSEAD ( email )

Boulevard de Constance
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Julien Hugonnier (Contact Author)

Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL Dorigny
Extranef
Lausanne, CH-1015
Switzerland

HOME PAGE: http://https://www.epfl.ch/labs/sfi-jh/

Swiss Finance Institute

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

Rodolfo Prieto

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

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