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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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    References listed on IDEAS

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    Cited by:

    1. Zhao, Zhongkuang & Li, Shuqi & Xiong, Heping, 2014. "Short sale constraints, disperse pessimistic beliefs and market efficiency — Evidence from the Chinese stock market," Economic Modelling, Elsevier, vol. 42(C), pages 333-342.
    2. Hasan, Iftekhar & Massoud, Nadia & Saunders, Anthony & Song, Keke, 2015. "Which financial stocks did short sellers target in the subprime crisis?," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 87-103.
    3. Cakici, Nusret & Goswami, Gautam & Tan, Sinan, 2014. "Options resilience during extreme volatility: Evidence from the market events of May 2010," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 262-274.
    4. Paulo Pereira da Silva, 2016. "Did Investors Seeking Short Exposure Move to the CDS Market after the 2011 Short-Sale Bans in European Financial Stocks?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(4), pages 322-353, August.
    5. Cheng-Few Lee & Woan-lih Liang & Fu-Lai Lin & Yating Yang, 2016. "Applications of simultaneous equations in finance research: methods and empirical results," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 943-971, November.
    6. Korn, Olaf & Krischak, Paolo & Theissen, Erik, 2017. "Illiquidity transmission from spot to futures markets," CFR Working Papers 14-10, University of Cologne, Centre for Financial Research (CFR).
    7. Bohl, Martin T. & Klein, Arne C. & Siklos, Pierre L., 2014. "Short-selling bans and institutional investors' herding behaviour: Evidence from the global financial crisis," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 262-269.
    8. 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.
    9. R. Jared DeLisle & Bong Soo Lee & Nathan Mauck, 2016. "The dynamic relation between options trading, short selling, and aggregate stock returns," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 645-671, October.
    10. 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.
    11. Reed, Adam V., 2015. "Connecting supply, short-sellers and stock returns: Research challenges," Journal of Accounting and Economics, Elsevier, vol. 60(2), pages 97-103.
    12. 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.
    13. 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.
    14. Félix, Luiz & Kräussl, Roman & Stork, Philip, 2016. "The 2011 European short sale ban: A cure or a curse?," Journal of Financial Stability, Elsevier, vol. 25(C), pages 115-131.
    15. 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.
    16. repec:oup:rfinst:v:29:y:2016:i:12:p:3211-3244. is not listed on IDEAS
    17. Yubin Li & Chen Zhao & Zhaodong Zhong, 2016. "Migrate or not? The effects of regulation SHO on options trading activities," Review of Derivatives Research, Springer, vol. 19(2), pages 113-146, July.
    18. repec:oup:revfin:v:29:y:2016:i:12:p:3211-3244. is not listed on IDEAS
    19. repec:gam:jjrfmx:v:11:y:2018:i:2:p:17-:d:139005 is not listed on IDEAS
    20. Marco Valerio Geraci & Tomas Garbaravicius & David Veredas, 2016. "Short Selling in the Tails," Working Papers ECARES ECARES 2016-30, ULB -- Universite Libre de Bruxelles.
    21. Louis Gagnon & Jonathan Witmer, 2014. "Distribution of Ownership, Short Sale Constraints, and Market Efficiency: Evidence from Cross-Listed Stocks," Financial Management, Financial Management Association International, vol. 43(3), pages 631-670, September.

    More about this item

    Keywords

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

    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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