Abstract
To short a stock, an arbitrageur must first borrow it. This paper describes the market for borrowing and lending U.S. equities, with an
emphasis on the conditions generating and sustaining short sales constraints. Eighteen months (4/2000-9/2001) of daily data provided by a
large institutional lending intermediary establish a rich set of facts on loan supply (“shortability”), loan fees (“specialness”), and loan recalls.
The data suggests that while loan market specials and recall are rare on average, the incidence of these short sales constraints is increasing in
the divergence of opinion among investors. An implication is that beyond some threshold, investor optimism itself can limit arbitrage via the
loan market mechanism.