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Stock Loan Fee as Return Predictor

November 24, 2020 • Posted in Short Selling

Do stocks with high borrowing costs reliably underperform? In their October 2020 paper entitled “The Loan Fee Anomaly: A Short Seller’s Best Ideas”, Joseph Engelberg, Richard Evans, Gregory Leonard, Adam Reed and Matthew Ringgenberg examine equity loan fees (stock borrowing costs) as a predictor of stock returns. For perspective, they compare returns of their loan fee anomaly portfolio (short stocks with highest fees and long stocks with lowest fees) to those of 102 other anomalies individually and in aggregate (based on difference for each stock between number of long signals and number of short signals). They consider four long-short anomaly portfolios based on extreme 1%, 2%, 5% and 10% (deciles) of stocks ranked by the metric for each anomaly. They exclude stocks with share price below $5 and those below the 5th percentile of NYSE market capitalization. Using modeled loan fees, monthly total returns for associated stocks and monthly total returns for 102 other anomalies during 2006 through 2019, they find that: (more…)

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