FIN-01-023

Securities Lending, Shorting, and Pricing

September 24, 2001

Darrell Duffie, Nicolae Garleanu and Lasse Heje Pedersen

ABSTRACT

We present a model of asset valuation in which short-selling is achieved by searching for security lenders and by bargaining over the terms of the lending fee. If lendable securities are difficult to locate, then the price of the security is initially elevated, and expected to decline over time. This price decline is to be anticipated, for example, after an initial public offering (IPO), among other cases, and is increasing in the degree of heterogeneity of beliefs of investors about the likely future value of the security. The initial price of a security may be above even the most optimistic buyer's valuation of the security's future dividends, because of the additional prospect of lending fees for owners.


Darrell Duffie
Institution: Graduate School of Business, Stanford University, Stanford, CA 94305-5015
Telephone: 650 723 1976
Email: duffie@stanford.edu

Nicolae Garleanu
Institution: Graduate School of Business, Stanford University, Stanford, CA 94305-5015
Telephone: 650 725 7270
Email: ngarlea@leland.stanford.edu

Lasse Heje Pedersen
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0359
Fax: (212) 995-4233
Email: lpederse@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~lpederse

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