Working Paper: CEPR ID: DP18256
Authors: Adem Atmaz; Suleyman Basak; Fangcheng Ruan
Abstract: We develop a dynamic model of costly stock short-selling and lending market and obtain implications that simultaneously support many empirical regularities related to short-selling. In our model, investors’ belief disagreement leads to shorting demand, whereby short-sellers pay shorting fees to borrow stocks from lenders. Our main novel results are as follows. Short interest is positively related to shorting fee and predicts stock returns negatively. Higher short-selling risk can be associated with lower stock returns and less short-selling activity. Stock volatility is increased under costly short-selling. An application to GameStop episode yields implications consistent with observed patterns.
Keywords: shortselling; stock lending; belief disagreement; shorting fee; short interest; predictive power; volatility; shortselling risk; GameStop
JEL Codes: G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shorting fees (G13) | short interest (G12) |
| short interest (G12) | demand for short-selling (G19) |
| short-selling risk (G17) | stock returns (G12) |
| costly short-selling conditions (G19) | stock volatility (G17) |
| belief disagreement (D80) | demand for short-selling (G19) |
| shorting fees (G13) | stock prices (G12) |
| GameStop episode (L81) | implications of model regarding shorting fees and stock prices (G19) |