Options, Short Sales, and Market Completeness

Stephen Figlewski and Gwendolyn P Webb

Journal of Finance, 1993, vol. 48, issue 2, 761-77

Abstract: This paper presents empirical evidence that trading in options contributes to both transactional and informational efficiency of the stock market by reducing the effect of constraints on short sales. The significantly higher average level of short interest exhibited by optionable stocks supports the argument that options facilitate short selling. The authors also find significant effects on option prices related to the short interest in the underlying stock. They then present evidence that options also increase information efficiency. Earlier work, that is replicated and extended here, has suggested that short sale constraints cause stock prices to underweight negative information. Options appear to reduce that effect. Copyright 1993 by American Finance Association.

Date: 1993
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