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Do option markets undo restrictions on short sales? Evidence from the 2008 short-sale ban

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  • Grundy, Bruce D.
  • Lim, Bryan
  • Verwijmeren, Patrick
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    Abstract

    The effectiveness of any sanction depends on the costs of avoiding its restrictions. We examine whether bearish option strategies were substitutes for short sales during the September 2008 short-sale ban. We find a significant diminution in option volumes and a significant increase in option bid-ask spreads for banned stock relative to unbanned stock during the ban period. Apparent violations of the put-call parity bound became significantly more frequent for banned stocks during the ban period. We conclude that the ban acted as an effective restriction on trading in options.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X12000955
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 106 (2012)
    Issue (Month): 2 ()
    Pages: 331-348

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    Handle: RePEc:eee:jfinec:v:106:y:2012:i:2:p:331-348

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Short-sale restrictions; Option markets; Spread relative to optionality; Put-call parity;

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    References

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    Cited by:
    1. Bohl, Martin T. & Klein, Arne C. & Siklos, Pierre L., 2013. "Are short sellers positive feedback traders? Evidence from the global financial crisis," Journal of Financial Stability, Elsevier, vol. 9(3), pages 337-346.
    2. Hao, Xiaoting & Lee, Eunju & Piqueira, Natalia, 2013. "Short sales and put options: Where is the bad news first traded?," Journal of Financial Markets, Elsevier, vol. 16(2), pages 308-330.
    3. Easton, Steve & Pinder, Sean & Uylangco, Katherine, 2013. "A case study of short-sale constraints and limits to arbitrage," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3924-3929.
    4. Delisle, R. Jared & Lee, Bong Soo & Mauck, Nathan, 2012. "The dynamic relation between short sellers, option traders, and aggregate returns," MPRA Paper 42566, University Library of Munich, Germany.

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