Option prices and costly short-selling

Adem Atmaz and Suleyman Basak

Journal of Financial Economics, 2019, vol. 134, issue 1, 1-28

Abstract: Much empirical evidence shows that stock short-selling costs and bans have significant effects on option prices. We reconcile these findings by providing a dynamic analysis of option prices with costly short-selling and option market makers. We obtain simple, closed-form, unique option bid and ask prices that represent option market makers’ expected hedging costs, and are weighted averages of well-known benchmark prices (Black–Scholes, Heston). Our analysis delivers rich implications that support the empirical evidence on the effects of short-selling costs and bans on option prices, as well as uncovering several novel predictions. We also apply our methodology to corporate bonds, which have option-like payoffs.

Keywords: Option prices; Options market making; Shorting fee; Partial lending; Short-selling bans (search for similar items in EconPapers)
JEL-codes: G12 G13 G23 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (7)

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Working Paper: Option Prices and Costly Short-Selling (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:134:y:2019:i:1:p:1-28

DOI: 10.1016/j.jfineco.2019.04.004

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