Journal of Financial and Quantitative Analysis Vol. 52 No. 6 2017

Deleveraging Risk

Scott A. Richardson^1,2,3,4,5; Pedro A. C. Saffi^1,2,3,4,5; Kari Sigurdsson

¹ Capital University · ² University of Washington · ³ University of Cambridge · ⁴ Brazilian Computer Society · ⁵ London Business School

Abstract

Deleveraging risk is the risk attributable to investing in a security held by levered investors. When there is an aggregate negative shock to the availability of funding capital, securities with a greater presence of levered investors experience extreme return realizations as these investors unwind their positions. Using data on equity loans as a proxy for the degree of levered positions in a given stock, we find robust evidence of deleveraging risk. Stocks with a high degree of short selling experience large positive returns and a decrease in short selling around periods of funding capital scarcity.

DOI

10.1017/s0022109017001077

Volume

52

Issue

6

Pages

2491-2522

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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