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Are stock and option trades substitutes or complements? evidence from the 2008 short-sale ban

Author

Listed:
  • Brian Du

    (California State University)

  • Alejandro Serrano

    (Pennsylvania State University)

  • Andre C. Vianna

    (Federal Government of Brazil, Ministry of the Economy National Treasury Attorney’s Office in the State of Santa Catarina)

Abstract

This study investigates the ability for option markets to mitigate short-sale constraints using the natural experiment of the short-sale ban in 2008. Following the SEC’s amendment prior to the second trading day of the ban that clarifies that market makers are exempt from the short sale ban, there was a significant increase in relative put option volume during the remaining 13 days of the ban. Employing the framework of Miller’s (1977) overvaluation hypothesis, the results suggest that put option trades reduce overpricing to the greatest extent when short-sale constraints are effectively binding and dispersion of investor opinion is large. Together, these results provide evidence that option trades act as substitutes for short selling.

Suggested Citation

  • Brian Du & Alejandro Serrano & Andre C. Vianna, 2024. "Are stock and option trades substitutes or complements? evidence from the 2008 short-sale ban," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 48(1), pages 166-185, March.
    • Handle: RePEc:spr:jecfin:v:48:y:2024:i:1:d:10.1007_s12197-023-09649-4
    DOI: 10.1007/s12197-023-09649-4
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    More about this item

    Keywords

    Option volume; Short-sale ban; Short selling; Banking;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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