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The Effect of Short Sale Constraint Removal on Volatility in the
Presence of Heterogeneous Beliefs

20 Pages Posted: 10 Aug 2007  

Amir Rubin

Simon Fraser University (SFU) - Beedie School of Business; Interdisciplinary Center (IDC) Herzliyah

Alan Kraus

University of British Columbia (UBC) - Division of Finance

Abstract

We evaluate the effect of index option initiation on a stock market in which short sales are prohibited. Our focus is the effect on the price volatility of the underlying asset. In a very simple dynamic model with successive generations of single-period investors, we show that volatility can either increase or decrease, depending on the variability of news about final payoffs. As an empirical illustration, we consider data from the Israeli stock market. The data show that volatility increased following the initiation of index options, consistent with the fact that short sales were prohibited in Israel when index options were introduced.

Notes: Previously titled Heterogeneous Beliefs, Short Sale Constraint, And The Effect Of Index Option Initiation On Price, Utility And Volatility

Keywords: Options, Short Sales Constraint, Volatility

JEL Classification: G11, G12

Suggested Citation

Rubin, Amir and Kraus, Alan, The Effect of Short Sale Constraint Removal on Volatility in the Presence of Heterogeneous Beliefs. International Review of Finance, Vol. 4, pp. 171-188, 2003; EFA 2002 Berlin Meetings Presented Paper; Sauder School of Business Working Paper. Available at SSRN: https://ssrn.com/abstract=1005439 or http://dx.doi.org/10.2139/ssrn.302003

Amir Rubin

Simon Fraser University (SFU) - Beedie School of Business ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Alan Kraus (Contact Author)

University of British Columbia (UBC) - Division of Finance ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8342 (Phone)
604-822-8521 (Fax)

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