Options and the Bubble

46 Pages Posted: 3 Aug 2004

See all articles by Robert H. Battalio

Robert H. Battalio

University of Notre Dame - Department of Finance

Paul H. Schultz

University of Notre Dame - Department of Finance

Date Written: March 2004

Abstract

Many believe that a bubble was behind the high prices of Internet stocks in 1999-2000, and that short-sale restrictions prevented rational investors from driving Internet stock prices to reasonable levels. Using intraday options data from the peak of the Internet bubble, we find no evidence that short-sale restrictions affected Internet stock prices. Investors could also cheaply short synthetically using options. Option strategies could also permit investors to mitigate synchronization risk. During this time, information was discovered in the options market and transmitted to the stock market, suggesting that the bubble could have been burst by options trading.

Suggested Citation

Battalio, Robert H. and Schultz, Paul H., Options and the Bubble (March 2004). AFA 2005 Philadelphia Meetings; EFA 2004 Maastricht Meetings Paper No. 3081. Available at SSRN: https://ssrn.com/abstract=558543 or http://dx.doi.org/10.2139/ssrn.558543

Robert H. Battalio

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States
574-631-9428 (Phone)
574-631-5255 (Fax)

Paul H. Schultz (Contact Author)

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States
219-631-3338 (Phone)
219-631-5255 (Fax)

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