A dynamic model for hard-to-borrow stocks
Traders with short positions in stocks that are subject to short-selling restrictions risk being 'bought in', in the sense that their positions may be closed out by the clearing firm at market prices. Marco Avellaneda and Mike Lipkin present a model for the dynamics of these 'hard-to-borrow' stocks, concluding that such restrictions result in increased volatility, and modified put-call parity and option pricing
Recent moves by regulators to put restrictions on short selling financial stocks have had many repercussions for financial markets. Such restrictions are known to lead to overpricing, in the sense used by Jones & Lamont (2002) - stock prices have been 'pumped up' by forced buying of short positions in the market - and have increased market volatility.
The availability of stocks for borrowing depends on market conditions. Firms usually charge a fee, often in the form of a reduced interest rate
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