Deleveraging risk
Journal
Journal of Financial and Quantitative Analysis
Subject
Accounting
Publishing details
Authors / Editors
Richardson S A;Saffi P;Sigurdsson K
Biographies
Publication Year
2017
Abstract
Deleveraging risk is the risk attributable to investing in a security held by levered investors. When there is an aggregate negative shock to the availability of funding capital, securities with a greater presence of levered investors experience extreme return realizations as these investors unwind their positions. Using data from equity lending markets as a proxy for the degree of levered positions, we find large positive returns and reductions in short selling quantities around periods of funding capital availability for highly shorted stocks. For example, during the Quant crisis, the daily abnormal returns to a portfolio that sells highly-shorted stocks and buys the least-shorted ones is -147 basis points, in contrast with +11 basis points during “normal” days.
Keywords
Deleveraging; equity lending; short selling; arbitrage capital
Available on ECCH
No