Asset Pricing with Costly Short Sales

58 Pages Posted: 29 Mar 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 2022

Abstract

We study a dynamic equilibrium model with costly-to-short stocks and heteroge- neous beliefs. The closed-form solution to the model shows that 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. This formula implies that returns satisfy a modified capital asset pricing model and sheds light on recent findings about the explanatory power of lending fees in the cross-section of returns. In particular, we show that once returns are appropriately adjusted for lending fees, stocks with low and high shorting costs offer similar risk-return tradeoffs.

Keywords: Dynamic equilibrium, heterogeneous beliefs, Securities lending, Shorting costs

JEL Classification: D51, D52, G11, G12

Suggested Citation

Evgeniou, Theodoros and Hugonnier, Julien and Prieto, Rodolfo, Asset Pricing with Costly Short Sales (March 2022). CEPR Discussion Paper No. DP17099, Available at SSRN: https://ssrn.com/abstract=4069907

Theodoros Evgeniou (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Julien Hugonnier

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
CH-1211 Geneva 4
Switzerland

Rodolfo Prieto

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
185
PlumX Metrics