Are stock and option trades substitutes or complements? evidence from the 2008 short-sale ban

Brian Du (), Alejandro Serrano () and Andre Vianna
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Brian Du: California State University
Alejandro Serrano: Pennsylvania State University

Journal of Economics and Finance, 2024, vol. 48, issue 1, No 8, 166-185

Abstract: Abstract This study investigates the ability for option markets to mitigate short-sale constraints using the natural experiment of the short-sale ban in 2008. Following the SEC’s amendment prior to the second trading day of the ban that clarifies that market makers are exempt from the short sale ban, there was a significant increase in relative put option volume during the remaining 13 days of the ban. Employing the framework of Miller’s (1977) overvaluation hypothesis, the results suggest that put option trades reduce overpricing to the greatest extent when short-sale constraints are effectively binding and dispersion of investor opinion is large. Together, these results provide evidence that option trades act as substitutes for short selling.

Keywords: Option volume; Short-sale ban; Short selling; Banking (search for similar items in EconPapers)
JEL-codes: G01 G13 G14 G20 G21 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s12197-023-09649-4

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