Do option markets undo restrictions on short sales? Evidence from the 2008 short-sale ban

Grundy, B.D., Lim, B. and Verwijmeren, P. (2012) Do option markets undo restrictions on short sales? Evidence from the 2008 short-sale ban. Journal of Financial Economics, 106(2), pp. 331-348. (doi: 10.1016/j.jfineco.2012.05.013)

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Abstract

The effectiveness of any sanction depends on the costs of avoiding its restrictions. We examine whether bearish option strategies were substitutes for short sales during the September 2008 short-sale ban. We find a significant diminution in option volumes and a significant increase in option bid-ask spreads for banned stock relative to unbanned stock during the ban period. Apparent violations of the put-call parity bound became significantly more frequent for banned stocks during the ban period. We conclude that the ban acted as an effective restriction on trading in options.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Verwijmeren, Professor Patrick
Authors: Grundy, B.D., Lim, B., and Verwijmeren, P.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:Journal of Financial Economics
ISSN:0304-405X

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