Abstract

http://ssrn.com/abstract=1884119
 
 

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Put-Call Parity Violations and Return Predictability: Evidence from the 2008 Short Sale Ban


George Nishiotis


University of Cyprus - Department of Accounting and Finance

Leonidas Rompolis


Athens University of Economics and Business - Department of Accounting and Finance

June 11, 2015


Abstract:     
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


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Date posted: July 12, 2011 ; Last revised: June 17, 2015

Suggested Citation

Nishiotis, George and Rompolis, Leonidas, Put-Call Parity Violations and Return Predictability: Evidence from the 2008 Short Sale Ban (June 11, 2015). Available at SSRN: http://ssrn.com/abstract=1884119 or http://dx.doi.org/10.2139/ssrn.1884119

Contact Information

George P. Nishiotis (Contact Author)
University of Cyprus - Department of Accounting and Finance ( email )
1 University Avenue
P.O. Box 20537
Nicosia CY-1678
Cyprus
357 22893617 (Phone)
357 22895475 (Fax)
Leonidas Rompolis
Athens University of Economics and Business - Department of Accounting and Finance ( email )
76 Patission Street
GR-104 34 Athens
Greece
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