Working Paper: NBER ID: w20282
Authors: Itamar Drechsler; Qingyi Freda Drechsler
Abstract: Short-rebate fees are a strong predictor of the cross-section of stock returns, both gross and net of fees. We document a large "shorting premium": the cheap-minus-expensive-to-short (CME) portfolio of stocks has a monthly average gross return of 1.43%, a net return of 0.91%, and a 1.53% four-factor alpha. We show that short fees interact strongly with the returns to eight of the largest and most well-known cross-sectional anomalies. The anomalies effectively disappear within the 80% of stocks that have low short fees, but are greatly amplified among those with high fees. We propose a joint explanation for these findings: the shorting premium is compensation for the concentrated short risk borne by the small fraction of investors who do most shorting. Because it is on the short side, it raises prices rather than lowers them. We proxy for this short risk using the CME portfolio return and demonstrate that a Fama-French + CME factor model largely captures the anomaly returns among both high- and low-fee stocks.
Keywords: shorting premium; asset pricing anomalies; stock returns; short fees; Fama-French model
JEL Codes: G10; G11; G12; G14; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| concentrated short risk (G19) | higher prices for high-fee stocks (G19) |
| shorting premium (G13) | compensates for risk taken by short sellers (G19) |
| low-fee stocks (G12) | weakened asset pricing anomalies (G19) |
| high-fee stocks (G12) | amplified asset pricing anomalies (G41) |
| shorting fees (G13) | stock returns (G12) |
| low short-fee stocks (G12) | higher returns (G12) |
| high short-fee stocks (G12) | lower returns (G19) |
| shorting fees (G13) | asset pricing anomalies (G12) |
| Fama-French four-factor model + shorting risk factor (C58) | captures anomaly returns (C58) |