1/ Term Structure of Short Selling Costs (Weitzner)

"Forward short selling costs (derived from put-call parity) predict future costs and stock returns. Short selling costs are higher over horizons when negative information is more likely to arrive."

2/ * Dividend payers excluded
* Cost of shorting (median across strikes) over the term of the option is back-calculated using synthetic relationships, then forward rates are calculated
* Options with negative implied shorting costs are excluded
* Spot lending data is from Markit
3/ "If earnings announcements are periods when negative information is more likely to arrive, then the term structure's shape should be affected by when an announcement takes place.

"Options that expire after the earnings announcements do have higher annualized shorting costs."
4/ "For options that expire within two weeks of each other, a 1 percentage point increase in the option shorting cost increases the probability of a negative earnings surprise by 0.97 pct points (3.2%); a 1 pct point increase in the slope increases it by 0.64 pct points (2.1%)."
5/ "Results are agnostic to pricing models and assumptions on stock return distributions. Simple no-arbitrage conditions predict negative earnings announcements. Market participants can observe options prices months in advance to assess the likelihood of a negative surprise."
6/ "Forward shorting costs predict future shorting costs.

"However, using differences is a more powerful test because levels are highly autocorrelated. Differences in current option shorting costs do predict future changes in option shorting costs."
7/ "Forward shorting costs can predict excess returns several months in advance.

"The controls' coefficients are not significant; however, the sample is limited to firms without dividends and with options, excluding the stocks in which anomaly returns are often concentrated."
8/ "Forward costs seem to strongly predict the corresponding month of returns beyond the first month's option shorting cost, suggesting that the horizon of short selling costs matters for return predictability."
9/ "Option shorting costs contain additional information regarding expected returns beyond the current stock loan fee at least over one month.

"However, option shorting costs do not seem to predict changes in stock loan fees."
10/ "This suggests arbitrageurs actively pay premiums to avoid the risk of recalls and offers a potential explanation as to why option shorting costs have minimal incremental predictive power for stock loan fees."
11/ Related research:

Short-Selling Risk

Borrowing Fees and Expected Stock Returns

Why Do Price and Volatility Information from the Options Market Predict Stock Returns?

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More from @ReformedTrader

5 Jan
1/ Will My Risk Parity Strategy Outperform? (Anderson, Bianchi, Goldberg)

"We gauge the potential of four strategies: value weighting, 60/40, unlevered and levered risk parity. Costs can reverse the ranking, especially when leverage is employed."

papers.ssrn.com/sol3/papers.cf… Image
2/ * U.S. stocks and U.S. Treasury bonds are inverse vol weighted (36-month rolling estimates)
* Monthly rebalancing
* Leveraged risk parity targets the ex post volatility of the market portfolio
* Trading costs are assumed to be 1% (1926-55), 0.5% (1956-70), and 0.1% *1971-2010) ImageImageImageImage
3/ "From 1926-2010, levered risk parity (financed at the 90-day T-bill rate) had the highest return. However, the performance was uneven."

NOTE: The U.S. stock/bond portfolio (no commodities) studied here may not be sufficiently diversified across asset classes. ImageImage
Read 9 tweets
4 Jan
1/ Option Trading Costs Are Lower than You Think (Muravyev, Pearson)

"Options price changes are predictable at high frequency. Effective spreads of traders who time executions are less than 40% of the size given by conventional measures."

papers.ssrn.com/sol3/papers.cf… Image
2/ * Trades and intraday bid/ask at one-minute frequencies for all U.S. listed equity options and the underlying stocks

* Option trades ≤ 10 cents, trades for which trade direction cannot be determined, and trades during the first and last five minutes of the day are removed ImageImageImage
3/ "Conventional measures of transactions costs are large: The effective spreads are about 80% of the size of the quoted spreads. The price impacts are also large.

"ITM options have relative (dollar) spreads that are smaller (larger) than those of options in the full sample." ImageImage
Read 17 tweets
3 Jan
New SSRN papers, January 2021
(I haven't read these yet, but they have abstracts that look interesting.)

Law of One Price in Equity Volatility Markets

Peer Momentum

December 2020 edition:
On Systematic Skewness and Stock Returns

Rivals’ Returns

Intangible Value

Is There a Value Premium in Cryptoasset Markets?
Salience Theory and the Cross-Section of Stock Returns: International and Further Evidence

Cross-section of Industry Equity Returns and Global Tactical Asset Allocation across Regions and Industries
Read 13 tweets
31 Dec 20
1/ Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies (Chu, Hirshleifer, Ma)

"We examine the causal effect of limits to arbitrage using Regulation SHO, which relaxed short-sale constraints for a set of pilot stocks, as a natural experiment."

2/ "Reg SHO removed the uptick rule and bid price test on randomly selected pilot stocks.

"The SEC then eliminated short-sale price tests for all exchange-listed stocks, so SHO effectively ran from 5/2/2005 to 7/6/2007."

11 anomalies: L/S decile portfolios, equally weighted
3/ "We confirm that the pilot firms were in fact randomly assigned with respect to firm characteristics associated with the 11 anomalies.

"Results suggest that there was no significant difference between pilot and non-pilot firms prior to the announcement of the pilot program."
Read 14 tweets
29 Dec 20
1/ SPY betas of EFA, EEM, and DBC over the past ten years (contrast with TLT)... draw your own conclusions about diversification potential, etc.

(The beta measurement is a composite of metrics from three months out to five years.)

EFA: Image
2/ EEM: Image
3/ DBC: Image
Read 9 tweets
29 Dec 20
1/ Bubbles for Fama (Greenwood, Shleifer, You)

"A sharp price increase of an industry portfolio does not, on average, predict unusually low returns going forward, but such sharp price increases predict a substantially heightened probability of a crash."

papers.ssrn.com/sol3/papers.cf… Image
2/ "On average, industries that experienced a price run-up continue to go up by 7% over the next year (5% net of market) and 0% over the next two years (0% net of market).

"An *industry* run-up is also associated with poor average subsequent *market* returns." Image
3/ "If we study only cases in which a crash occurs, the average return experienced between the initial run-up and subsequent peak is 30% (107% for precious metal stocks in the late 1970s). It is difficult to bet against a bubble, even if one has correctly identified it ex-ante." Image
Read 14 tweets

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