Online research seminar "The Term Structure of Shorting Risk"

Stock lending is typically an overnight agreement where short sellers pay a fee for borrowing a security. The lending is subject to two distinct short-selling risks that may force to close positions before they pay off: price risk (rerating) and quantity risk (recall). An alternative to borrowing directly is to construct a synthetic short position using options. Short-selling risks, effectively hedging risk for options market makers, must enter the arbitrage between the two markets. Options bid-ask spreads contain information about the expected price of shorting, lendable quantities (utilization), and volatility. I jointly estimate the term structure of implied securities lending fees, implied utilization, and implied volatility and find that the implied lending fees co-vary with the spot fee. The median lending fee risk premium is 4% per annum, but can be much higher for hard-to-borrow stocks and shorter maturities. The downward shape of the term structure is indicative of large, low- probability jump risk and lending fees. Finally, the estimated term structure of implied volatility is on average flat across horizons. This suggests the documented implied volatility term structure behavior may be misspecified when lending fee term structure is ignored.