Dancing to the Same Tune: Commonality in Securities Lending Fees

61 Pages Posted: 27 Oct 2020 Last revised: 1 Jul 2021

See all articles by Spencer Andrews

Spencer Andrews

University of North Carolina (UNC) at Chapel Hill - Finance Area

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School; Frank Hawkins Kenan Institute of Private Enterprise

Adam V. Reed

University of North Carolina Kenan-Flagler Business School

Date Written: September 10, 2020

Abstract

We document that there is commonality in the loan fees that short sellers pay, and the common component of loan fees explains a significant amount of their variation. The time series of the loan fee common component is highly correlated with several well-documented asset pricing and macro factors, suggesting that loan fee commonality is associated with states of the world that are consequential to investors. At the asset level, we compute sensitivities of stocks’ loan fees to the loan fee common component and document that stocks with high loan fees tend to also exhibit high sensitivity to the loan fee common component. While controlling for other priced short-selling factors, we document a statistically significant negative relationship between the systematic volatility of loan fees (with respect to the loan fee common component) and stock returns, indicating that this commonality is priced in the cross-section of stock returns. In addition to this pricing implication, we present evidence that loan fee commonality is associated with lower price efficiency,
suggesting that loan fee commonality is an important limit to arbitrage. Finally, we present evidence that loan demand may be the primary driver of the observed fee commonality.

Keywords: short selling, commonality, factors, lending fees, loan fees, principal component analysis, PCA

JEL Classification: G12, G14, G19

Suggested Citation

Andrews, Spencer and Lundblad, Christian T. and Reed, Adam V., Dancing to the Same Tune: Commonality in Securities Lending Fees (September 10, 2020). Available at SSRN: https://ssrn.com/abstract=3690337 or http://dx.doi.org/10.2139/ssrn.3690337

Spencer Andrews (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
3026502645 (Phone)

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

Frank Hawkins Kenan Institute of Private Enterprise ( email )

Campus Box 3440, The Kenan Center
Chapel Hill, NC 27599-344
United States

Adam V. Reed

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

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