Put-Call Parity Violations and Return Predictability: Evidence from the 2008 Short Sale Ban

57 Pages Posted: 12 Jul 2011 Last revised: 12 Sep 2016

George Nishiotis

University of Cyprus - Department of Accounting and Finance

Leonidas Rompolis

Athens University of Economics and Business - Department of Accounting and Finance

Date Written: June 27, 2016

Abstract

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

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

George P. Nishiotis (Contact Author)

University of Cyprus - Department of Accounting and Finance ( email )

1 University Avenue
P.O. Box 20537
Nicosia CY-1678
Cyprus
357 22893617 (Phone)
357 22895475 (Fax)

Leonidas Rompolis

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

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