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27-10-2023

Are stock and option trades substitutes or complements? evidence from the 2008 short-sale ban

Authors: Brian Du, Alejandro Serrano, Andre C. Vianna

Published in: Journal of Economics and Finance

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Abstract

This study investigates the ability for option markets to mitigate short-sale constraints using the natural experiment of the short-sale ban in 2008. Following the SEC’s amendment prior to the second trading day of the ban that clarifies that market makers are exempt from the short sale ban, there was a significant increase in relative put option volume during the remaining 13 days of the ban. Employing the framework of Miller’s (1977) overvaluation hypothesis, the results suggest that put option trades reduce overpricing to the greatest extent when short-sale constraints are effectively binding and dispersion of investor opinion is large. Together, these results provide evidence that option trades act as substitutes for short selling.

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Metadata
Title
Are stock and option trades substitutes or complements? evidence from the 2008 short-sale ban
Authors
Brian Du
Alejandro Serrano
Andre C. Vianna
Publication date
27-10-2023
Publisher
Springer US
Published in
Journal of Economics and Finance
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI
https://doi.org/10.1007/s12197-023-09649-4