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How Much Does It Cost To Short Sale A Stock Index ? * 1. Introduction In a comprehensive study of the borrowing/lending market for stocks, D’Avolio (2002) showed that constituents of the S&P 500 are almost always general collateral. Such a result means that the rebate rate received on the collateral deposit by the borrower of a stock pertaining to the S&P 500 is very close to the prevailing market interest rates when the short is undertaken. Using a different sample, Ofek et al. (2003) also showed that more than 70% of the stocks in their sample have a null rebate rate spread, that is the difference between (i) the rebate rate and (ii) the standard rebate rate on the majority of stocks, which is known as the “cold” rate, is zero. Geczy et al. (2002) found that in their sample, Large and Medium general collaterals have rebate rates that are 8 bp (0.08%) and 15 bp only below the Federal Funds Effective Rate. Therefore, it may safely be concluded that the cost of shorting the S&P 500 Index is likely to be negligible. In addition to the empirical findings cited above, there exist a very liquid market for S&P 500 futures, and the market for S&P Deposit Receipt (SPDR) recorded a constant growth of activity since its launching in 1993, two facts that are likely to ease even more short selling of the S&P 500. The evidence about rebate rates relative to market interest rates have been supplemented by analyses of the short sale cost that is implicit in options prices, notably by Ofek et al. (2003), Evans et al. (2003) and Lamont and Thaler (2003). This approach builds upon the well-documented evidence that the existence of options helps short selling of the underlying stocks (see Figlewski and Webb (1993), Sorescu (2000) and * We are very grateful to Raphael Franck for extensive Editorial Assistance and especially to Patrice Poncet for very detailed comments on previous drafts of this paper. The first author acknowledges financial support from The Maurice Falk Institute for Economic Research in Israel.

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