How Do Short-Sale Costs Affect Put Options Trading? Evidence from Separating Hedging and Speculative Shorting Demands

Review of Finance, Forthcoming

59 Pages Posted: 22 Jul 2014 Last revised: 10 Sep 2015

See all articles by Tse-Chun Lin

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Xiaolong Lu

The University of Hong Kong - Faculty of Business and Economics

Date Written: September 10, 2015

Abstract

We find that put options trading volume and bid-ask spreads both increase with equity lending fees. However, we also find that put options trading volume decreases with lending fees for banned stocks during the 2008 Short-Sale Ban period, when only options market makers could short. By separating the speculative demand of short sellers from the hedging demand of options market makers in the lending market, our results provide a thorough analysis of the interaction between the options market and the equity lending market. We also shed light on the substitutability/complementarity between put options volume and short interest shown in the literature.

Keywords: Put options, short-sale costs, lending fee, short selling, 2008 Short-Sale Ban

JEL Classification: G11, G12, G14

Suggested Citation

Lin, Tse-Chun and Lu, Xiaolong, How Do Short-Sale Costs Affect Put Options Trading? Evidence from Separating Hedging and Speculative Shorting Demands (September 10, 2015). Review of Finance, Forthcoming . Available at SSRN: https://ssrn.com/abstract=2469696 or http://dx.doi.org/10.2139/ssrn.2469696

Tse-Chun Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Xiaolong Lu

The University of Hong Kong - Faculty of Business and Economics ( email )

Rm1122, KK Leung Building
Pokfulam Road
Hong Kong
China

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