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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

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.

Suggested Citation

  • Grundy, Bruce D. & Lim, Bryan & Verwijmeren, Patrick, 2012. "Do option markets undo restrictions on short sales? Evidence from the 2008 short-sale ban," Journal of Financial Economics, Elsevier, vol. 106(2), pages 331-348.
    • Handle: RePEc:eee:jfinec:v:106:y:2012:i:2:p:331-348
    DOI: 10.1016/j.jfineco.2012.05.013
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    More about this item

    Keywords

    Short-sale restrictions; Option markets; Spread relative to optionality; Put-call parity;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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