The Cost of Short‐Selling Liquid Securities
- Author(s): SNEHAL BANERJEE, JEREMY J. GRAVELINE
- Published: Mar 07, 2013
- Pages: 637-664
- DOI: 10.1111/jofi.12009
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.