The value of shorting
This paper assesses the effects of short-sale constraints on asset prices. The analysis focuses on a particular period in Sweden during which shorting stocks was impossible but stock options were traded. Firstly, the effect on both stock options and the underlying stock was investigated jointly by considering deviations from put-call-parity. Secondly, the effects on only the derivatives were investigated by considering their implied volatilites. The main findings are: (i) the impact on pricing are consistent with a short-sale constraint, (ii) these effects are much more pronounced when shorting is not possible, (iii) these effects are not solely attributable to the mispricing of the stock, as previous research indicates, and (iv) access to international shorting markets can alleviate local short-sale constraints.
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- Zivney, Terry L., 1991. "The Value of Early Exercise in Option Prices: An Empirical Investigation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(01), pages 129-138, March.
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- Day, Theodore E. & Lewis, Craig M., 1988. "The behavior of the volatility implicit in the prices of stock index options," Journal of Financial Economics, Elsevier, vol. 22(1), pages 103-122, October.
- Kleidon, Allan W & Whaley, Robert E, 1992. " One Market? Stocks, Futures, and Options during October 1987," Journal of Finance, American Finance Association, vol. 47(3), pages 851-77, July.
- Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
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