Do option markets undo restrictions on short sales? Evidence from the 2008 short-sale ban
Bruce D Grundy, Bryan Lim, Patrick Verwijmeren
JOURNAL OF FINANCIAL ECONOMICS | ELSEVIER SCIENCE SA | Published : 2012
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. © 2012 Elsevier B.V.