Securities Lending and Trading by Active and Passive Funds

Pekka Honkanen
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Pekka Honkanen: HEC Paris

No 1390, HEC Research Papers Series from HEC Paris

Abstract: U.S. mutual funds that participate in the securities lending market extract information from stock borrowing. Active mutual funds exploit this information for trading by rebalancing their portfolios away from borrowed stocks, whereas passive funds do not. This trading avoids capital losses on borrowed stocks, whose prices tend to decrease. Active funds also trade more aggressively on stocks with more negative future returns, suggesting that they are able to identify informed borrowing. Finally, passive funds charge higher lending fees than active funds, which is consistent with short sellers paying a premium to lenders with lower recall risk.

Keywords: Securities lending; short selling; mutual funds (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2020-10-15
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1390

DOI: 10.2139/ssrn.3679808

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