Articlegreen2012

The Cost of Short‐Selling Liquid Securities

63 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Corporate Finance and Governance Stochastic processes and financial applications

Abstract

ABSTRACT Standard models of liquidity argue that the higher price for a liquid security reflects the future benefits that long investors expect to receive. We show that short‐sellers can also pay a net liquidity premium if their cost to borrow the security is higher than the price premium they collect from selling it. We provide a model‐free decomposition of the price premium for liquid securities into the net premiums paid by both long investors and short‐sellers. Empirically, we find that short‐sellers were responsible for a substantial fraction of the liquidity premium for on‐the‐run Treasuries from November 1995 through July 2009.

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References

1986Asset pricing and the bid-ask spread 2004Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market 2011Securitized banking and the run on repo 2002Securities lending, shorting, and pricing 2004The Flight‐to‐Liquidity Premium in U.S. Treasury Bond Prices 2002The bond/old-bond spread 1991Liquidity, Maturity, and the Yields on U.S. Treasury Securities 1996Special Repo Rates

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