Put-Call Parity Violations and Return Predictability: Evidence from the 2008 Short Sale Ban
University of Cyprus - Department of Accounting and Finance
Athens University of Economics and Business - Department of Accounting and Finance
June 11, 2015
We investigate the link between stock and options markets during the U.S. 2008 short sale ban. We document a significant increase in put-call parity violations resulting from delayed incorporation of bad news in stock relative to option prices. A portfolio formed on the trading signal that the put-call parity violation is in the top 10% quantile underperforms the financial sector index by 3.5% on a daily basis. Furthermore, panel regression analysis reveals that return predictability is stronger for stocks with liquid options. Finally, formal assessment of information dynamics reveals a strong information flow from the options to the stock market.
Number of Pages in PDF File: 53
Keywords: Short sale ban; put-call parity; return predictability; limits to arbitrage; market efficiency; information flow dynamics.
JEL Classification: G13, G14
Date posted: July 12, 2011 ; Last revised: June 17, 2015
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