Nicolae Garleanu

Securities Lending, Shorting, and Pricing

We present a model of asset valuation in which short-selling is achieved by searching for security lenders and by bargaining over the terms of the lending fee. If lendable securities are di cult to locate, then the price of the security is initially elevated, and expected to decline over time. This price decline is to be anticipated, for example,after an initial public o ering (IPO), among other cases, and is increasing in the degree of heterogeneity of beliefs of investors about the likely future value of the security. The initial price of a securitymay be above even the most optimistic buyers valuation of the securitys future dividends, because of the additional prospect of lendingfees for owners.

Impediments to Financial Trade: Theory and Measurement

We propose a tractable model of an informationally inefficient market. We show the equivalence between our model and a substantially simpler model whereby investors face distortive investment taxes depending both on their identity and the asset class. We use this equivalence to assess existing approaches to inferring whether individual investors have informational advantages. We also develop a methodology of inferring the magnitude of the frictions (implicit taxes) that impede financial trade. We illustrate the methodology by using data on cross-country portfolio holdings and returns to quantify these frictions, and locate the directions in which financial trade seems to be especially impeded. We argue that our measure of frictions contains useful information for the sources of failure of frictionless models, and it helps in studying whether certain factors (such as the size of the financial sector) are associated with lower financial frictions.