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Short-Sale Constraints and Options Trading: Evidence from Reg SHO

Published online by Cambridge University Press:  09 August 2019

Yi-Wen Chen ,
Sheng-Syan Chen  and
Robin K. Chou
Yi-Wen Chen*
Affiliation:
Y.-W. Chen, ywchen@swufe.edu.cn, Southwestern University of Finance and Economics School of Finance
Sheng-Syan Chen
Affiliation:
S.-S. Chen, sschenfn@nccu.edu.tw, National Chengchi University College of Commerce
Robin K. Chou
Affiliation:
Chou, rchou@nccu.edu.tw, National Chengchi University College of Commerce
*
Y.-W. Chen (corresponding author), ywchen@swufe.edu.cn
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Abstract

We examine the effects of a temporary suspension of short-sale price tests on the options market. Consistent with the notion that put option trading substitutes for short selling, we find a significant reduction in put option volume. In addition, pressure on put option prices significantly declines, violations of the put-call parity become significantly less frequent, and option volume becomes less informed. Our findings add clarity to a long-standing debate on whether investors use options to circumvent equity short-selling restrictions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 5 , August 2020 , pp. 1555 - 1579
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We thank an anonymous referee, Chang-Chuang Chang, Jennifer Conrad (the editor), Bing Han, Ji-Chai Lin, Alexander Ljungqvist, Andy Puckett, Michael Sikorski, and conference and seminar participants at the 2014 Conference on the Theories and Practices of Securities and Financial Markets, the 2015 Financial Management Association Meetings, National Central University, National Chengchi University, Southwestern University of Finance and Economics, and Yuan-Ze University for their valuable comments and suggestions. Part of this research was done while S.-S. Chen was a professor at National Taiwan University. Y.-W. Chen, S.-S. Chen, and Chou gratefully acknowledge financial support from the Fundamental Research Funds for the Central Universities of China (JBK1806003) and the Ministry of Science and Technology of Taiwan (MOST-106-2410-H-004-183-MY3 and MOST-103-2410-H-004-028), respectively.

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