Overcoming Arbitrage Limits: Option Trading and Momentum Returns

84 Pages Posted: 24 Jul 2018 Last revised: 29 May 2020

See all articles by Abhay Abhyankar

Abhay Abhyankar

MOVE

Ilias Filippou

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

Pedro Angel Garcia-Ares

Instituto Tecnológico Autónomo de México (ITAM)

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 Angel, Overcoming Arbitrage Limits: Option Trading and Momentum Returns (January 27, 2019). Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3206873 or http://dx.doi.org/10.2139/ssrn.3206873

Abhay Abhyankar

MOVE ( email )

Campus de Bellaterra-UAB Edifici B
Cerdanyola del Vallès
Barcelona, Catalunya 08193
Spain

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

Pedro Angel Garcia-Ares (Contact Author)

Instituto Tecnológico Autónomo de México (ITAM)

Av. Camino a Sta. Teresa 930
Col. Héroes de Padierna
Mexico City, D.F. 01000, Federal District 01080
Mexico

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