Limits on Yield Extracted from Lending an Equity

Summary

The document asks how much near riskless yield an investor can earn from holding a stock, beyond ordinary equity price gains, when the shares must eventually be returned. It questions whether stock lending captures the full available yield or whether synthetic positions could earn more. One proposed construction combines ownership, an equity swap linked to a high borrow rate, and lending another position.

The discussion offers no proof or resolved strategy. It raises forward pricing as a possible way to infer an equity’s monetizable yield, while noting that funding rates differ across market participants. The question also flags short squeezes as a reason to scrutinize the proposed synthetic trade. Any upper bound would depend on market conventions, financing, borrow availability, and the definition of the baseline return; those issues are left open.

Key ideas

• The question distinguishes income from owning a stock from gains due to changes in its price.
• It asks whether stock lending sets an upper bound on yield available without alpha.
• A synthetic swap and lending construction is proposed but not validated.
• Forward pricing is suggested as a possible way to estimate implied yield, with funding-rate differences as a caveat.

Tags

# What is the maximum yield that can be received from owning an equity?


# What is the maximum yield that can be received from owning an equity?












Suppose I lend you an equity security for ten years, interest-free, and you have to return it to me at the end of term (which means little-to-no risk-taking). What is the maximum (near-)riskless yield that can be "extracted" from holding the stock, in the absence of alpha? (I distinguish "yield" from "gains in the stock's value"; the latter of these doesn't count. Equivalently I'm asking about maximum yield above baseline equity returns.) Can this maximum be proven? The naive (obvious?) answer is "the best you can do is lend the stock" but I wonder if we can do better than this in general.

One strategy I thought of was to own the stock $S$, enter into an equity swap paying $S$ and receiving $X$ where $X$ is the inverse return of the stock with the highest borrow rate, buying $X$, and then lending it out. I know I must be missing something here (because short squeezes would be much rarer if one could synthetically lend in this way), but I'm not sure where I went wrong.

As far as proving an upper bound goes, I think maybe you could back out the monetizability of an equity by looking at the forward price and solving for $q$ in $F=S_0\exp((r-q)t)$, but this may not be practical since different market participants have different values for $r$.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.