Overcoming Arbitrage Limits: Option Trading and Momentum Returns

82 Pages Posted: 24 Jul 2018 Last revised: 8 May 2019

See all articles by Abhay Abhyankar

Abhay Abhyankar

University of Exeter Business School, University of Exeter

Ilias Filippou

Washington University in St. Louis - John M. Olin Business School; University of Warwick

Pedro Garcia-Ares

University of Exeter

Ozkan Haykir

University of Exeter Business School - Department of Finance

Date Written: January 27, 2019

Abstract

In this paper we find that the decline in the momentum profitability is partly driven by option trading. Momentum profits arise from the short leg and therefore on barriers to short selling. We find strong evidence that the presence of stock options creates alternate avenues for short selling, augmenting the stock lending market, thus contributing to improved pricing efficiency. However, when option trading becomes expensive, there are more barriers to short selling and the short position offers lower returns. Our results are robust to exogenous changes in short selling due to Regulation SHO and are supported by other short-leg depended anomalies.

Keywords: Momentum Returns, Stock Option Trading, Short-Sale Constraints

JEL Classification: G11, G12, G14, G32

Suggested Citation

Abhyankar, Abhay and Filippou, Ilias and Garcia-Ares, Pedro and Haykir, Ozkan, Overcoming Arbitrage Limits: Option Trading and Momentum Returns (January 27, 2019). Available at SSRN: https://ssrn.com/abstract=3206873 or http://dx.doi.org/10.2139/ssrn.3206873

Abhay Abhyankar

University of Exeter Business School, University of Exeter ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

Ilias Filippou

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

University of Warwick ( email )

Scarman Road
West Midlands, CV4 7AL
United Kingdom
+44(0)2476522393 (Phone)

HOME PAGE: http://sites.google.com/site/ifilippou1/

Pedro Garcia-Ares (Contact Author)

University of Exeter ( email )

Northcote House
The Queen's Drive
Exeter, Devon EX4 4QJ
United Kingdom

Ozkan Haykir

University of Exeter Business School - Department of Finance ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

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