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

Grundy , Bruce D.; Lim, Bryan; Verwijmeren, Patrick

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

Journal of Financial Economics (JFE), Forthcoming

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

See all articles by Bruce D. Grundy

Bryan Lim

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

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

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

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