Securities Lending, Shorting, and Pricing

35 Pages Posted: 3 Nov 2008

See all articles by Darrell Duffie

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Canadian Derivatives Institute

Nicolae Garleanu

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Date Written: September 2001

Abstract

We present a model of asset valuation in which short-selling is achieved by searching for security lenders and by bargaining over the terms of the lending fee. If lendable securities are di cult to locate, then the price of the security is initially elevated, and expected to decline over time. This price decline is to be anticipated, for example,after an initial public o ering (IPO), among other cases, and is increasing in the degree of heterogeneity of beliefs of investors about the likely future value of the security. The initial price of a securitymay be above even the most optimistic buyer's valuation of the security's future dividends, because of the additional prospect of lendingfees for owners.

Suggested Citation

Duffie, James Darrell and Garleanu, Nicolae Bogdan and Pedersen, Lasse Heje, Securities Lending, Shorting, and Pricing (September 2001). NYU Working Paper No. FIN-01-023, Available at SSRN: https://ssrn.com/abstract=1294558

James Darrell Duffie (Contact Author)

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Lasse Heje Pedersen

AQR Capital Management, LLC ( email )

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Copenhagen Business School - Department of Finance ( email )

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