Do Option Markets Undo Restrictions on Short Sales? Evidence from the 2008 Short-Sale Ban

54 Pages Posted: 22 Nov 2009 Last revised: 22 Dec 2011

See all articles by Bruce D. Grundy

Bruce D. Grundy

RSFAS Australian National University

Bryan Lim

University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Patrick Verwijmeren

Erasmus University Rotterdam (EUR)

Date Written: 2010 WFA Meeting paper

Abstract

The effectiveness of any sanction depends on the costs of avoiding its restrictions. We examine whether bearish option strategies were substitutes for short sales during the September 2008 short-sale ban. We find a significant diminution in option volumes and a significant increase in option bid-ask spreads for banned stock relative to unbanned stock during the ban period. Apparent violations of the put-call parity bound became significantly more frequent for banned stocks during the ban period. We conclude that the ban acted as an effective restriction on trading in options.

Keywords: short-sale restrictions, option markets, put-call parity

JEL Classification: G01, G12, G14, G18

Suggested Citation

Grundy, Bruce D. and Lim, Bryan and Verwijmeren, Patrick, Do Option Markets Undo Restrictions on Short Sales? Evidence from the 2008 Short-Sale Ban (2010 WFA Meeting paper). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1509726

Bruce D. Grundy (Contact Author)

RSFAS Australian National University ( email )

Kingsley Street
Acton ACT
Australia
0431247108 (Phone)

Bryan Lim

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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