Equity lender base and limits to arbitrage: Position-level evidence from mutual funds

66 Pages Posted: 9 Dec 2022 Last revised: 22 Apr 2024

See all articles by Xi Dong

Xi Dong

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Qifei Zhu

National University of Singapore (NUS)

Date Written: December 2, 2022

Abstract

We provide the first comprehensive analysis on equity lender base utilizing newly available fund-stock level lending data. We find that short sellers predominantly borrow from a small set of repeated lenders whose composition differs across stocks. We argue that this lender base structure indicates inelastic lending supply, which limits arbitrage. When existing lenders exit, short sellers struggle to find replacement lenders, even though conventional lending supply measures appear slack. Consequently, lending fees surge, exacerbating mispricing in the equity market. Ex ante, risks implied by lender concentration are priced. Our results suggest that lending-side frictions are an important source of market inefficiency.

Keywords: Limits to Arbitrage, Equity Lending, Short Selling, Mutual Funds

JEL Classification: G11, G12, G14, G23

Suggested Citation

Dong, Xi and Zhu, Qifei, Equity lender base and limits to arbitrage: Position-level evidence from mutual funds (December 2, 2022). Available at SSRN: https://ssrn.com/abstract=4291572 or http://dx.doi.org/10.2139/ssrn.4291572

Xi Dong

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

One Bernard Baruch Way, Box B10-225
New York City, NY 10010
United States

HOME PAGE: http://xidongbaruch.weebly.com/

Qifei Zhu (Contact Author)

National University of Singapore (NUS) ( email )

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228
Singapore

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