2024 North American Summer Meeting: June, 2024
Asset prices and exchange rates with short-selling risk
Edouard Djeutem
We study the role of short selling risk (volatility of stock lending fees) in determining real exchange rates and international asset prices. We construct a model of the world economy, where heterogeneous investors can borrow and lend stocks across countries. The equilibrium shorting fee endogenously clears the associated markets. Aggregate shocks transmit internationally through short selling fee movements. The strength of this transmission is governed by the distribution of wealth between short sellers and stock lenders. We show that short selling risk amplifies the effects of shocks and that adjustments to shorting fee leads to high stock correlations.
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