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The value of shorting

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  • Nilsson, Roland

Abstract

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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  • Nilsson, Roland, 2008. "The value of shorting," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 880-891, May.
  • Handle: RePEc:eee:jbfina:v:32:y:2008:i:5:p:880-891
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    References listed on IDEAS

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    1. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-1168, September.
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    6. Ofek, Eli & Richardson, Matthew & Whitelaw, Robert F., 2004. "Limited arbitrage and short sales restrictions: evidence from the options markets," Journal of Financial Economics, Elsevier, vol. 74(2), pages 305-342, November.
    7. Kamara, Avraham & Miller, Thomas W., 1995. "Daily and Intradaily Tests of European Put-Call Parity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(04), pages 519-539, December.
    8. 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.
    9. 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 851-877, July.
    10. 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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    Cited by:

    1. Le, Van & Zurbruegg, Ralf, 2016. "The impact of short sale restrictions on informed trading in the stock and options markets," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 262-273.
    2. Takahashi, Hidetomo, 2010. "Short-sale inflow and stock returns: Evidence from Japan," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2403-2412, October.
    3. Jain, Archana & Jain, Pankaj K. & McInish, Thomas H. & McKenzie, Michael, 2013. "Worldwide reach of short selling regulations," Journal of Financial Economics, Elsevier, vol. 109(1), pages 177-197.
    4. Phillips, Blake, 2011. "Options, short-sale constraints and market efficiency: A new perspective," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 430-442, February.
    5. Chen, Crystal Xiaobei & Rhee, S. Ghon, 2010. "Short sales and speed of price adjustment: Evidence from the Hong Kong stock market," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 471-483, February.
    6. Blau, Benjamin M. & Van Ness, Robert A. & Warr, Richard S., 2012. "Short selling of ADRs and foreign market short-sale constraints," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 886-897.
    7. Hayunga, Darren K. & Holowczak, Richard D. & Lung, Peter P. & Nishikawa, Takeshi, 2012. "Derivatives traders’ reaction to mispricing in the underlying equity," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2438-2454.
    8. Agyei-Ampomah, Sam & Mazouz, Khelifa, 2011. "The comovement of option listed stocks," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2056-2069, August.

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