The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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The Cost of Short‐Selling Liquid Securities
Published: 11/26/2012 | DOI: 10.1111/jofi.12009
SNEHAL BANERJEE, JEREMY J. GRAVELINE
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.