Snehal Banerjee is with Northwestern University and Jeremy J. Graveline is with the University of Minnesota. We are grateful for comments from Philip Bond; Joost Driessen; Darrell Duffie; Joseph Engelberg; Michael Fleming; Nicolae Gârleanu; Arvind Krishnamurthy; Francis Longstaff; David Matsa; Lasse Pedersen; Raj Singh; Dimitri Vayanos; Pierre-Olivier Weill; and participants at the NBER AP Meeting (San Francisco, 2010), the Adam Smith Asset Pricing Meeting (Oxford, 2011), the SFS Cavalcade (Ann Arbor, 2011), and the Western Finance Association Meeting (Santa Fe, 2011).
The Cost of Short-Selling Liquid Securities
Article first published online: 7 MAR 2013
© 2013 the American Finance Association
The Journal of Finance
Volume 68, Issue 2, pages 637–664, April 2013
How to Cite
BANERJEE, S. and GRAVELINE, J. J. (2013), The Cost of Short-Selling Liquid Securities. The Journal of Finance, 68: 637–664. doi: 10.1111/jofi.12009
- Issue published online: 7 MAR 2013
- Article first published online: 7 MAR 2013
- Accepted manuscript online: 26 NOV 2012 11:32AM EST
- Initial submission: July 7, 2010; Final version received: April 3, 2012
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.