Market Risk and Efficiency

Deleveraging Risk

Topics - Market Risk and Efficiency Equities

${ numberSection } ${ text }
Deleveraging Risk

Working Paper

In this paper we find evidence that deleveraging risk — the risk of losses due to a sudden and widespread reduction in stocks held by levered investors — affects equity returns.

Using various measures of short selling activity from multiple sources for a large sample of U.S. securities, we find that stocks with high short selling activity experience occasional and very large positive returns when tighter credit made it difficult for highly leveraged short sellers to hold their positions.

Consistent with prior research, we find that, on average, there is a negative relation between measures of short selling activity and future stock returns across a variety of measures of short selling activity. However, extending the past literature, we document evidence of occasional very large positive returns to short selling activity.

We further find that these episodes of positive returns are associated with (i) discrete liquidity events such as the quant crisis of August 2007 and the Lehman Brothers bankruptcy in September 2008, and (ii) reductions in funding capital availability as reflected in a variety of measures, such changes in TED spread, a measure of marketwide credit risk based on the difference between the interest rates on essentially risk-free short-term U.S. government debt and the rates banks charge on loans to other banks.

The effects of capital shocks are economically significant and persist for up to 60 trading days for most of the measures we used. The effect on equity lending quantities is also persistent: we find evidence of significantly lower quantities on loan for up to 60 trading days.

AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.


The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.


Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.


Diversification does not eliminate the risk of experiencing investment loss.


Certain publications may have been written prior to the author being an employee of AQR.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.


AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR.