Abstract

http://ssrn.com/abstract=1005439
 
 

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The Effect of Short Sale Constraint Removal on Volatility in the
Presence of Heterogeneous Beliefs


Amir Rubin


Simon Fraser University (SFU) - Beedie School of Business; Interdisciplinary Center (IDC) Herzliyah

Alan Kraus


University of British Columbia (UBC) - Division of Finance


International Review of Finance, Vol. 4, pp. 171-188, 2003
EFA 2002 Berlin Meetings Presented Paper
Sauder School of Business Working Paper

Abstract:     
We evaluate the effect of index option initiation on a stock market in which short sales are prohibited. Our focus is the effect on the price volatility of the underlying asset. In a very simple dynamic model with successive generations of single-period investors, we show that volatility can either increase or decrease, depending on the variability of news about final payoffs. As an empirical illustration, we consider data from the Israeli stock market. The data show that volatility increased following the initiation of index options, consistent with the fact that short sales were prohibited in Israel when index options were introduced.

Note: Previously titled Heterogeneous Beliefs, Short Sale Constraint, And The Effect Of Index Option Initiation On Price, Utility And Volatility

Number of Pages in PDF File: 20

Keywords: Options, Short Sales Constraint, Volatility

JEL Classification: G11, G12

Accepted Paper Series





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Date posted: August 10, 2007  

Suggested Citation

Rubin, Amir and Kraus, Alan, The Effect of Short Sale Constraint Removal on Volatility in the Presence of Heterogeneous Beliefs. International Review of Finance, Vol. 4, pp. 171-188, 2003; EFA 2002 Berlin Meetings Presented Paper; Sauder School of Business Working Paper. Available at SSRN: http://ssrn.com/abstract=1005439 or http://dx.doi.org/10.2139/ssrn.302003

Contact Information

Amir Rubin
Simon Fraser University (SFU) - Beedie School of Business ( email )
8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada
Interdisciplinary Center (IDC) Herzliyah ( email )
P.O. Box 167
Herzliya, 46150
Israel
Alan Kraus (Contact Author)
University of British Columbia (UBC) - Division of Finance ( email )
2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8342 (Phone)
604-822-8521 (Fax)
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