|
Archive@NYU >
Stern School of Business >
Salomon Center >
Derivatives Research >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26831
|
| Title: | Limited Arbitrage and Short Sales Restrictions: Evidence from the
Options Markets |
| Authors: | Ofek, Eli
Richardson, Matthew
Whitelaw, Robert F. |
| Issue Date: | 2002 |
| Series/Report no.: | S-DRP-02-08 |
| Abstract: | In this paper, we investigate empirically the well-known put-call parity
no-arbitrage relation in the presence of short sale restrictions. We use
a new and comprehensive sample of options on individual stocks in
combination with a measure of the cost and difficulty of short selling,
specifically the spread between the rate a short-seller earns on the
proceeds from the sale relative to the normal rate (the rebate rate
spread). We find statistically and economically significant violations
of put-call parity that are strongly related to the rebate rate spread.
Stocks with negative rebate rate spreads exhibit prices in the stock
market that are up to 7.5% greater than those implied in the options
market (for the extreme 1% tail). Even after accounting for transaction
costs in the options markets, these violations persist and their
magnitude appears to be related to the general level of valuations in
the stock market. Moreover, the extent of violations of put-call parity
and the rebate rate spread for individual stocks are significant
predictors of future stock returns. For example, cumulative abnormal
returns, net of borrowing costs, over a 2½-year sample period can
exceed 70%. It is difficult to reconcile these results with rational
models of investor behavior, and, in fact, they are consistent with the
presence of over-optimistic irrational investors in the markets for some
individual securities. |
| URI: | http://hdl.handle.net/2451/26831 |
| Appears in Collections: | Derivatives Research
|
All items in Faculty Digital Archive are protected by copyright, with all rights reserved.
|
