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Price Efficiency in Securities Lending

Author

Listed:
  • Evangelos Benos

    (University of Cyprus)

  • Gerardo Ferrara

    (Bank of England)

  • Angelo Ranaldo

    (University of Basel - Faculty of Business and Economics; Swiss Finance Institute)

  • Vittorio Vergano

    (University of Basel; Swiss Finance Institute)

Abstract

Securities lending-the temporary transfer of securities in exchange for collateral-is essential to the modern financial system, facilitating short selling, market making, and efficient liquidity management. Yet, little is known about how these contracts are priced. Using comprehensive transaction-level data, we identify the determinants of returns from lending the same security against cash or securities collateral. We develop a model in which lending returns compensate for security risk, illiquidity, and the use of scarce dealer balance-sheet capacity. We also define a return wedge between the two market segments. Consistent with the model, the wedge widens with risk, illiquidity, dealer constraints, and collateral reusability but narrows as participation across both segments increases.

Suggested Citation

  • Evangelos Benos & Gerardo Ferrara & Angelo Ranaldo & Vittorio Vergano, 2026. "Price Efficiency in Securities Lending," Swiss Finance Institute Research Paper Series 26-61, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2661
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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