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Deleveraging Risk

Author

Listed:
  • Richardson, Scott
  • Saffi, Pedro A. C.
  • Sigurdsson, Kari

Abstract

Deleveraging risk is the risk attributable to investing in a security held by levered investors. When there is an aggregate negative shock to the availability of funding capital, securities with a greater presence of levered investors experience extreme return realizations as these investors unwind their positions. Using data on equity loans as a proxy for the degree of levered positions in a given stock, we find robust evidence of deleveraging risk. Stocks with a high degree of short selling experience large positive returns and a decrease in short selling around periods of funding capital scarcity.

Suggested Citation

  • Richardson, Scott & Saffi, Pedro A. C. & Sigurdsson, Kari, 2017. "Deleveraging Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(6), pages 2491-2522, December.
    • Handle: RePEc:cup:jfinqa:v:52:y:2017:i:06:p:2491-2522_00
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    Cited by:

    1. William N. Goetzmann & Dasol Kim, 2018. "Negative bubbles: What happens after a crash," European Financial Management, European Financial Management Association, vol. 24(2), pages 171-191, March.
    2. Hu, Conghui & Liu, Yu-Jane & Zhu, Ning, 2019. "De-Leverage and illiquidity contagion," Journal of Banking & Finance, Elsevier, vol. 102(C), pages 1-18.
    3. Geraci, Marco Valerio & Garbaravičius, Tomas & Veredas, David, 2018. "Short selling in extreme events," Journal of Financial Stability, Elsevier, vol. 39(C), pages 90-103.

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