The Shorting Premium and Asset Pricing Anomalies

ITAMAR DRECHSLER and QINGYI FREDA DRECHSLER

ABSTRACT

Short rebate fees are a strong predictor of the cross-section of stock returns, both
gross and net of fees. We document a large \shorting premium": the cheap-minus-
expensive-to-short (CME) portfolio of stocks has a monthly average gross return of
1.31%, a net-of-fees return of 0.78%, and a 1.44% four-factor alpha. We show that
short fees interact strongly with the returns to eight of the largest and most well-
known cross-sectional anomalies. The anomalies e ectively disappear within the 80% of stocks that have low fees, but are especially large among the high-fee stocks, even net of fees. We propose an explanation for these ndings: the shorting premium is arbitrageurs' compensation for the concentrated risk they bear in shorting overpriced stocks. Because this risk is on the short side, a larger premium means a more overpriced stock. We proxy for shorting risk using stocks' covariance with the CME portfolio, and demonstrate that a Fama-French + CME factor model largely captures the anomalies'returns within both high- and low-fee stocks.

Keywords: shorting premium, stock lending fees, anomalies, cross-section, concen-
trated risk, di erences of opinion