Do option markets undo restrictions on short sales? Evidence from the 2008 short-sale ban

Bruce D. Grundy, Bryan Lim and Patrick Verwijmeren

Journal of Financial Economics, 2012, vol. 106, issue 2, 331-348

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.

Keywords: Short-sale restrictions; Option markets; Spread relative to optionality; Put-call parity (search for similar items in EconPapers)
JEL-codes: G01 G12 G14 G18 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (56)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:106:y:2012:i:2:p:331-348

DOI: 10.1016/j.jfineco.2012.05.013

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