Abstract

http://ssrn.com/abstract=1534932
 
 

References (31)



 
 

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Regulatory Uncertainty and Market Liquidity: The 2008 Short Sale Ban's Impact on Equity Option Markets


Robert H. Battalio


University of Notre Dame - Department of Finance

Paul H. Schultz


University of Notre Dame - Department of Finance

January 11, 2010


Abstract:     
We examine how the confusion and regulatory uncertainty generated by the imposition of short sale restrictions in September 2008 impacted equity option markets. We uncover three primary findings. First, investors seeking short exposure in financial stocks did not migrate to the option market to avoid the short sale ban. Second, the short sale restrictions are associated with dramatically increased bid ask spreads for options on banned stocks that are not solely attributable to inflated bid ask spreads on the underlying stocks. We conservatively estimate that over the course of the ban, liquidity demanding investors trading options on banned stocks paid an additional $505 million in transactions costs due to inflated bid ask spreads. Third, synthetic share prices for banned stocks become significantly lower than actual share prices. Our results provide a reminder that regulations imposed in the middle of the night in response to political pressure are likely to have severe unintended consequences.

Number of Pages in PDF File: 65

Keywords: equity option markets, short sales, hedging, bid ask spreads

JEL Classification: G10, G18, G14

working papers series


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Date posted: January 12, 2010  

Suggested Citation

Battalio, Robert H. and Schultz, Paul H., Regulatory Uncertainty and Market Liquidity: The 2008 Short Sale Ban's Impact on Equity Option Markets (January 11, 2010). Available at SSRN: http://ssrn.com/abstract=1534932 or http://dx.doi.org/10.2139/ssrn.1534932

Contact Information

Robert H. Battalio (Contact Author)
University of Notre Dame - Department of Finance ( email )
P.O. Box 399
Notre Dame, IN 46556-0399
United States
574-631-9428 (Phone)
574-631-5255 (Fax)
Paul H. Schultz
University of Notre Dame - Department of Finance ( email )
P.O. Box 399
Notre Dame, IN 46556-0399
United States
219-631-3338 (Phone)
219-631-5255 (Fax)
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