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http://ssrn.com/abstract=1961788
 
 

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Trading in Derivatives When the Underlying is Scarce


Snehal Banerjee


Kellogg School of Management - Department of Finance

Jeremy J. Graveline


University of Minnesota - Carlson School of Management

August 20, 2013


Abstract:     
Regulatory restrictions and market frictions can constrain the aggregate quantity of long and short positions in a security. When these constraints bind, we refer to the security as scarce, and its price becomes distorted relative to its value in a frictionless market. We show that an otherwise redundant derivative can reduce the price distortion of the underlying security by relaxing its scarcity. We also show that it is especially important to analyze the underlying and derivative markets jointly when evaluating the impact of regulation, such as short-sales bans and position limits in derivatives, that restricts trade.

Number of Pages in PDF File: 50

Keywords: Scarcity, Short-selling, Price distortions, Derivatives, Regulation

JEL Classification: G12, G13

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Date posted: November 20, 2011 ; Last revised: August 21, 2013

Suggested Citation

Banerjee, Snehal and Graveline, Jeremy J., Trading in Derivatives When the Underlying is Scarce (August 20, 2013). Available at SSRN: http://ssrn.com/abstract=1961788 or http://dx.doi.org/10.2139/ssrn.1961788

Contact Information

Snehal Banerjee (Contact Author)
Kellogg School of Management - Department of Finance ( email )
Evanston, IL 60208
United States
Jeremy J. Graveline
University of Minnesota - Carlson School of Management ( email )
19th Avenue South
Minneapolis, MN 55455
United States
612-626-7817 (Phone)
HOME PAGE: http://www.tc.umn.edu/~jeremy/
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