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The effect of trading futures on short sale constraints

Author

Listed:
  • Robert Jarrow

    (Cornell University [New York])

  • Philip Protter

    (Columbia University [New York])

  • Sergio Pulido

    (CMU - Carnegie Mellon University [Pittsburgh])

Abstract

It is commonly believed that the trading of futures on a commodity enables the market to overcome short selling constraints on the spot commodity itself. This belief is embedded in the notion that trading strategies involving futures contracts enable traders to replicate the payoffs as if they were short the spot commodity. The purpose of this paper is to investigate this common belief in a general arbitrage-free semimartingale financial model with trading in futures and a short selling prohibition on the spot commodity. We show via various examples that, in general, this common belief is incorrect. Furthermore, we provide a set of sufficient conditions, albeit very restrictive, under which the common belief is true.

Suggested Citation

  • Robert Jarrow & Philip Protter & Sergio Pulido, 2015. "The effect of trading futures on short sale constraints," Post-Print hal-02265269, HAL.
    • Handle: RePEc:hal:journl:hal-02265269
    DOI: 10.1111/mafi.12013
    Note: View the original document on HAL open archive server: https://hal.science/hal-02265269
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    References listed on IDEAS

    as
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    Cited by:

    1. Delia Coculescu & Monique Jeanblanc, 2019. "Some no-arbitrage rules under short-sales constraints, and applications to converging asset prices," Finance and Stochastics, Springer, vol. 23(2), pages 397-421, April.
    2. Robert A. Jarrow, 2015. "Asset Price Bubbles," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 201-218, December.
    3. Jianqiang Hu & Tianxiang Wang & Wenwei Hu & Jun Tong, 2020. "The impact of trading restrictions and margin requirements on stock index futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(7), pages 1176-1191, July.
    4. Sergio Pulido, 2010. "The fundamental theorem of asset pricing, the hedging problem and maximal claims in financial markets with short sales prohibitions," Papers 1012.3102, arXiv.org, revised Jan 2014.

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