Thursday, June 16, 2016

Equity Lending, Short Sales & Limits to Arbitrage

Wow. Can't believe it's been almost a year since my last post. Need to be more disciplined and write more often to please my 4 readers!

Anyway, this week JBS's Insight has written a story talking about my "Ownership Structure, Limits to Arbitrage and Stock Returns: Evidence from Equity Lending Market"paper (joint work with my amazing co-authors Melissa Porras Prado (Nova SBE) and Jason Sturgess (DePaul)).

Here is the main summary:

“Stocks with lower, more concentrated, short-term, and less passive ownership exhibit lower lending supply, higher costs of shorting, and higher arbitrage risk,” concludes the study of nearly 5,000 US stocks over a four-year period (2006-2010) – forthcoming in the Review of Financial Studies.

In simple terms: suppose that someone told you that a glass is 50 per cent full. While this is relevant information, it also matters whether the glass contains water, milk or wine, its temperature and expiry date. The article examines a wide list of institutional ownership characteristics, and shows that stocks with lower, more concentrated, short-term, and less passive institutional ownership exhibit lower lending supply, higher costs of shorting, and higher arbitrage risk.

Overall, it means that arbitrageurs will face higher costs to trade and more uncertainty when trying to exploit market inefficiencies, which in turn results in both less efficient prices and delays in incorporating pessimistic investors’ opinions.


To download the paper, just click here.