 The 2011 European Short Sale Ban: An Option Market PerspectiveRoman Kräussl, Luiz Félix and Philip Stork LSF Research Working Paper Series from Luxembourg School of Finance, University of Luxembourg Abstract: We examine how the 2011 European short sale ban affected jump risk and contagion risk of both banned and unbanned stocks. Using Extreme Value Theory, we estimate the tails of stock options’ risk-neutral densities to calculate extreme downside risk. Using this measure and implied volatility skews, we find that on ban announcement day jump risk abruptly rose for all stocks and subsequently remained elevated, impacting especially banned stocks. We show that it is the imposition of the ban itself that led to the increase in jump risk rather than other causes such as information flow, options trading volumes, or stock specific factors. We document that contagion risk decreased for banned stocks after imposition of the ban, while it increased for unbanned stocks. Substitution effects were minimal, as both banned stocks’ put trading volumes and put-call ratios declined during the ban. We argue that the ban curbed further selling pressure and decreased contagion risk in financial stocks, by redirecting trading activity towards index options. "Keywords:Short sale ban; jump risk; risk-neutral density; implied volatility skew; contagion risk" JEL-codes: G01 G14 G28 (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:crf:wpaper:14-02 Access Statistics for this paper More papers in LSF Research Working Paper Series from Luxembourg School of Finance, University of Luxembourg Contact information at EDIRC. |
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