Abstract

http://ssrn.com/abstract=423881
 
 

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Failure is an Option: Impediments to Short Selling and Options Prices


Richard B. Evans


University of Virginia - Darden School of Business

Adam V. Reed


University of North Carolina Kenan-Flagler Business School

Christopher Geczy


University of Pennsylvania - The Wharton School, Finance Department

David K. Musto


University of Pennsylvania - Finance Department

December 7, 2005

EFA 2003 Glasgow

Abstract:     
Regulations allow market makers to short sell without borrowing stock, and the transactions of a major options market maker show that in most hard-to-borrow situations, it chooses not to borrow and instead fails to deliver stock to its buyers. Some of the value of failing passes through to option prices: when failing is cheaper than borrowing, the relation between borrowing costs and option prices is significantly weaker. The remaining value is profit to the market maker, and its ability to profit despite the usual competition between market makers appears to result from a cost advantage of larger market makers at failing.

Number of Pages in PDF File: 46

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Date posted: August 1, 2003  

Suggested Citation

Evans, Richard B. and Reed, Adam V. and Geczy, Christopher and Musto, David K., Failure is an Option: Impediments to Short Selling and Options Prices (December 7, 2005). EFA 2003 Glasgow. Available at SSRN: http://ssrn.com/abstract=423881 or http://dx.doi.org/10.2139/ssrn.423881

Contact Information

Richard B. Evans
University of Virginia (UVA) - Darden School of Business ( email )
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4030 (Phone)
434-243-7680 (Fax)
HOME PAGE: http://faculty.darden.virginia.edu/evansr/
Adam V. Reed (Contact Author)
University of North Carolina Kenan-Flagler Business School ( email )
Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Christopher Charles Geczy
University of Pennsylvania - The Wharton School, Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
(215) 898-1698 (Phone)
(215) 898-6200 (Fax)
David K. Musto
University of Pennsylvania - Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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