Up Next

ki-logo-white
Market-Based Solutions to Vital Economic Issues

SEARCH

ki-logo-white
Market-Based Solutions to Vital Economic Issues
Research
May 1, 2013

Connecting Two Markets: An Equilibrium Framework for Shorts, Longs and Stock Loans

Abstract

We analyze a framework for understanding the impact of the equity lending market on share prices. Using very few assumptions, we show that the effect of shocks to the supply or demand for share ownership, the fraction of shares made available to short sellers by shareholders, short sale regulations, and disagreement among investors depends critically on whether a stock is hard to borrow or freely available. Empiricists analyzing the effect of these shocks or short sale regulations will find that an effect exists largely among hard to borrow stocks. We confirm empirically these equilibrium predictions. For example, we find that when shares are removed from the equity lending market around dividend dates (due to tax considerations), prices of stocks on special increase 1.1%. Those prices then return to pre-dividend levels as shares are again made available to shorts.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.


View Working Paper View Publication on UNC Library View Publication on Journal Site

You may also be interested in: