57 Pages Posted: 12 Jul 2011 Last revised: 12 Sep 2016
Date Written: June 27, 2016
We show that the 2008 short-sale ban significantly enhanced the return predictability of put-call parity violations and attribute the significant increase in violations to stock over-valuation. The top quantile put-call parity violation portfolio under-performs the lowest quantile portfolio by a risk-adjusted daily return of 2.8% during the ban period. Panel regression analysis documents that a significant increase in return predictability during the ban is more pronounced for stocks with liquid options, further corroborating our results. Our findings are robust to a number of controls aimed at alleviating concerns that other concurrent policy changes and events might be driving our results.
Keywords: Short sale ban; put-call parity; return predictability; limits to arbitrage; market efficiency; information flow
JEL Classification: G13, G14
Suggested Citation: Suggested Citation
Nishiotis, George and Rompolis, Leonidas, Put-Call Parity Violations and Return Predictability: Evidence from the 2008 Short Sale Ban (June 27, 2016). Available at SSRN: https://ssrn.com/abstract=1884119 or http://dx.doi.org/10.2139/ssrn.1884119