Skip to main content

Deleveraging Risk


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.

Corresponding author
* Richardson,, London Business School and AQR Capital Management; Saffi (corresponding author),, University of Cambridge Judge Business School and CERF; and Sigurdsson,, AQR Capital Management.
Hide All

We thank Itzhak Ben-David, Hendrik Bessembinder (the editor), Ekkehart Boehmer (the referee), Markus Brunnermeier, Lauren Cohen, Kent Daniel, Peter Feldhütter, Marcelo Fernandes, Francisco Gomes, Jeremy Graveline, Ronen Israel, Lasse Pedersen, Tapio Pekkala, Ludovic Phalippou, Raghu Rau, Adam Reed, Ruy Ribeiro, Jason Sturgess, Avanidhar Subrahmanyam, and seminar participants at Fundação Getulio Vargas (SP), PUC-RJ, Fundação Getulio Vargas (RJ), the University of Warwick, the 2013 Asset Pricing Retreat, the 2013 Brazilian Finance Society meeting, the 2013 European Finance Association Meetings, the 2014 American Finance Association Meetings, the 2015 Cambridge–Princeton Workshop, the 2014 Hedge Fund Research Conference, the 2013 Inquire UK conference, the 2014 Inquire Europe–UK Spring Seminar, and the 2015 Consortium on Research in Hedge Funds, Trading Strategies & Related Topics for helpful comments and discussions. We gratefully acknowledge the support provided by Inquire Europe and the Cambridge Endowment for Research in Finance (CERF). We thank Andrew Ang for sharing his data on hedge fund leverage and Mark Mitchell for the convertible bond spread data.

Hide All
Acharya V., and Pedersen L.. “Asset Pricing with Liquidity Risk.” Journal of Financial Economics, 77 (2005), 375410.
Aitken M. J.; Frino A.; McCorry M. S.; and Swan P.. “Short Sales Are Almost Instantaneously Bad News: Evidence from the Australian Stock Exchange.” Journal of Finance, 53 (1998), 22052223.
Amihud Y.Illiquidity and Stock Returns: Cross Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 3156.
Ang A.; Gorovyy S.; and van Inwegen G. B.. “Hedge Fund Leverage.” Journal of Financial Economics, 102 (2011), 102126.
Arora N.; Gandhi P.; and Longstaff F. A.. “Counterparty Credit Risk and the Credit Default Swap Market.” Journal of Financial Economics, 103 (2012), 280293.
Asparouhova E.; Bessembinder H.; and Kalcheva I.. “Noisy Prices and Inference Regarding Returns.” Journal of Finance, 68 (2013), 665714.
Asquith P.; Pathak P. A.; and Ritter J. R.. “Short Interest, Institutional Ownership and Stock Returns.” Journal of Financial Economics, 78 (2005), 243276.
Barroso P., and Santa-Clara P.. “Momentum Has Its Moments.” Journal of Financial Economics, 116 (2016), 111120.
Ben-David I.; Franzoni F.; and Moussawi R.. “Hedge Fund Stock Trading in the Financial Crisis of 2007–2009.” Review of Financial Studies, 25 (2012), 154.
Boehmer E.; Jones C. M.; and Zhang X.. “Which Shorts Are Informed?Journal of Finance, 63 (2008), 491527.
Bollerslev T.; Hood B.; Huss J.; and Pedersen L. H.. “Risk Everywhere: Modelling and Managing Volatility.” Available at (2016).
Brennan M. J., and Subrahmanyam A.. “Market Microstructure and Asset Pricing: On the Compensation for Illiquidity in Stock Returns.” Journal of Financial Economics, 41 (1996), 441464.
Brunnermeier M., and Pedersen L. H.. “Market Liquidity and Funding Liquidity.” Review of Financial Studies, 22 (2009), 22012238.
Brunnermeier M., and Sannikov Y.. “The I-Theory of Money.” Working Paper, Princeton University (2014).
Cohen L.; Diether K. B.; and Malloy C. J.. “Supply and Demand Shifts in the Shorting Market.” Journal of Finance, 62 (2007), 20612096.
Corwin S. A., and Schultz P.. “A Simple Way to Estimate Bid-Ask Spreads from Daily High and Low Prices.” Journal of Finance, 67 (2012), 719759.
Coval J. D., and Stafford E.. “Asset Fire Sales (and Purchases) in Equity Markets.” Journal of Financial Economics, 86 (2007), 479512.
Daniel K.; Grinblatt M.; Titman S.; and Wermers R.. “Measuring Mutual Fund Performance with Characteristic-Based Benchmarks.” Journal of Finance, 52 (1997), 10351058.
Daniel K.; Jagannathan R.; and Kim S.. “Tail Risk in Momentum Strategy Returns.” Working Paper, Columbia University (2012).
Daniel K. D., and Moskowitz T. J.. “Momentum Crashes.” Journal of Financial Economics, 122 (2016), 221247.
Dechow P.; Hutton A. P.; Meulbroek L.; and Sloan R. G.. “Short-Sellers, Fundamental Analysis, and Stock Returns.” Journal of Financial Economics, 61 (2001), 77106.
Desai H.; Ramesh K.; Thiagarajan S. R.; and Balachandran B. V.. “An Investigation of the Informational Role of Short Interest in the Nasdaq Market.” Journal of Finance, 57 (2002), 22632287.
Duffie D.Presidential Address: Asset Price Dynamics with Slow Moving Capital.” Journal of Finance, 65 (2010), 12371267.
Fama E. F., and French K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 356.
Garleanu N., and Pedersen L. H.. “Margin-Based Asset Pricing and Deviations from the Law of One Price.” Review of Financial Studies, 24 (2011), 19802022.
Geanakoplos J.The Leverage Cycle.” NBER Macroeconomics Annual, 24 (2010), 166.
Geczy C.; Musto D.; and Reed A.. “Firms Are Special Too: An Analysis of the Equity Lending Market.” Journal of Financial Economics, 66 (2002), 241269.
Gorton G., and Metrick A.. “Securitized Banking and the Run on Repo.” Journal of Financial Economics, 104 (2012), 425451.
Greenwood R., and Thesmar D.. “Stock Price Fragility.” Journal of Financial Economics, 102 (2011), 471490.
Gromb D., and Vayanos D.. “Equilibrium and Welfare in Markets with Financially Constrained Arbitrageurs.” Journal of Financial Economics, 66 (2002), 361407.
Haldane A. G.“Patience and Finance.” Oxford China Business Forum, Bank of England (2010).
Hanson S. G., and Sunderam A.. “The Growth and Limits of Arbitrage: Evidence from Short Interest.” Review of Financial Studies, 27 (2014), 12381286.
Hasbrouck J., and Seppi D. J.. “Common Factors in Prices, Order Flows, and Liquidity.” Journal of Financial Economics, 59 (2001), 383411.
Hu G. X.; Pan J.; and Wang J.. “Noise as Information for Illiquidity.” Journal of Finance, 68 (2013), 23412382.
Jones C. M., and Lamont O. A.. “Short-Sale Constraints and Stock Returns.” Journal of Financial Economics, 66 (2002), 207329.
Khandani A. E., and Lo A.. “What Happened to the Quants in Aug. 2007? Evidence from Factors and Transactions Data.” Journal of Financial Markets, 14 (2011), 146.
Korajczyk R. A., and Sadka R.. “Pricing the Commonality across Alternative Measures of Liquidity.” Journal of Financial Economics, 87 (2008), 4572.
Kyle A. S.Continuous Auctions and Insider Trading.” Econometrica, 53 (1985), 13151335.
Kyle A. S., and Xiong W.. “Contagion as a Wealth Effect.” Journal of Finance, 56 (2001), 14011440.
Mancini L.; Ranaldo A.; and Wrampelmeyer J.. “Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums.” Journal of Finance, 68 (2013), 18051841.
Mitchell M., and Pulvino T.. “Arbitrage Crashes and the Speed of Capital.” Journal of Financial Economics, 104 (2012), 469490.
Moreira A., and Muir T.. “Volatility-Managed Portfolios.” Journal of Finance, 72 (2017), 16111644.
Newey W. K., and West K. D.. “Automatic Lag Selection in Covariance Matrix Estimation.” Review of Economic Studies, 61 (1994), 631653.
Ringgenberg M.“When Short Sellers Agree to Disagree: Short Sales, Volatility, and Heterogeneous Beliefs.” Working Paper, Washington University in St. Louis (2011).
Saffi P., and Sigurdsson K.. “Price Efficiency and Short Selling.” Review of Financial Studies, 24 (2011), 821852.
Shleifer A., and Vishny R. W.. “Liquidation Values and Debt Capacity: A Market Equilibrium Approach.” Journal of Finance, 47 (1992), 13431366.
Shleifer A., and Vishny R. W.. “The Limits of Arbitrage.” Journal of Finance, 52 (1997), 3555.
Shleifer A., and Vishny R. W.. “Fire Sales in Finance and Macroeconomics.” Journal of Economic Perspectives, 25 (2011), 2948.
White H.A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity.” Econometrica, 48 (1980), 817838.
Xiong W.Convergence Trading with Wealth Effects: An Amplification Mechanism in Financial Markets.” Journal of Financial Economics, 62 (2001), 247292.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
Type Description Title
Supplementary materials

Richardson et al supplementary material
Richardson et al supplementary material 1

 Unknown (136 KB)
136 KB


Full text views

Total number of HTML views: 0
Total number of PDF views: 62 *
Loading metrics...

Abstract views

Total abstract views: 258 *
Loading metrics...

* Views captured on Cambridge Core between 12th December 2017 - 19th January 2018. This data will be updated every 24 hours.