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
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: Suggested Citation
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