The value of accessing the stock lending market: Stock lending income bond and asset prices

Long-term equity investors who lend shares to short-sellers can earn stock lending income in the form of short-selling fees. This study treats stock lending income as an additional source of return—similar to dividends—for stock lenders. We model stock lending income as a bond with time-varying coupon, valuing stock lending income (SLI) using a Vasicek-like bond pricing framework. The SLI bond price and the expected return are related to the current short-selling fee. We suggest that when evaluating after-fee anomaly performance, one should adjust the returns of long-leg portfolios based on the short-selling fee. Numerical results indicate that this SLI bond can be valued at approximately 1 % of the investment base. In other words, access to the stock lending market adds about 1 % in value to an equity position—equivalent to roughly $239 billion in the U.S. mutual fund industry in 2023. We suggest that, because the market size of the mutual fund industry can be significantly undervalued, the regulatory agency should propose new reporting requirements on funds that heavily investing in stocks with high short-selling costs.