Stock Options, Stock Loans, and the Law of One Price

54 Pages Posted: 8 Mar 2018

See all articles by Jesse Blocher

Jesse Blocher

Vanderbilt University - Finance

Matthew Ringgenberg

University of Utah - Department of Finance

Date Written: February 28, 2018

Abstract

Historically, option market makers were exempt from borrowing shares when short selling which allowed them to hedge their exposure in hard-to-borrow stocks. As a result, options were not redundant securities -- they allowed traders to circumvent short-sale constraints. Regulators removed this exemption in 2008 and in 2013 they prohibited a workaround using 'reverse conversions'. These regulatory changes eliminated the shadow supply of hard-to-borrow shares provided by options; we find that these changes increased the redundancy of option securities and caused a significant increase in equity loan fees. Consequently, market quality has deteriorated: price efficiency is lower and stocks are more overpriced.

Keywords: Equity Options, Short Sales Constraints, Return Predictability, Price Efficiency, Equity Lending Market

JEL Classification: G12, G14

Suggested Citation

Blocher, Jesse and Ringgenberg, Matthew C., Stock Options, Stock Loans, and the Law of One Price (February 28, 2018). Vanderbilt Owen Graduate School of Management Research Paper No. 3087563, Available at SSRN: https://ssrn.com/abstract=3087563 or http://dx.doi.org/10.2139/ssrn.3087563

Jesse Blocher (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Matthew C. Ringgenberg

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
180
Abstract Views
1,088
rank
184,919
PlumX Metrics