How Do Short-sale Costs Affect Put Options Trading? Evidence from Separating Hedging and Speculative Shorting Demands

We find that put options bid-ask spread and put options trading volume both increase with equity lending fees. However, we also find that put options trading volume decreases with lending fees for banned stocks during the 2008 Short-Sale Ban period when only options market makers can short. By separating the speculative demand of short sellers from the hedging demand of options market makers in the lending market, our results provide a thorough analysis on the interaction between options market and equity lending market. We also reconcile the debate in the literature regarding the substitutability/complementarity between put options and short sales.

This event is organised by the Econometric Institute.
Twitter: @MetricsSeminars