The Term Structure of Short Selling Costs, Review of Finance

Authors: Gregory Weitzner

Publication: Review of Finance
Volume 27, Issue 6, November 2023, Pages 2125–2161.

Short sellers care about (i) how overvalued an asset is and (ii) when the overvaluation will be corrected. Hence, short selling costs should be higher over horizons when negative information is more likely to arrive. This article presents a model formalizing this intuition and tests the model using the put–call parity condition. Forward shorting costs predict future costs and stock returns, consistent with an expectations hypothesis in the shorting market. Additionally, an upward sloping term structure around earnings announcements increases the probability of a negative earnings surprise, evidence that short selling costs are higher over horizons when negative information is more likely to arrive. My findings suggest that the term structure of short selling costs conveys how long over pricings are expected to persist.