Premium
Options, Short Sales, and Market Completeness
Author(s) -
FIGLEWSKI STEPHEN,
WEBB GWENDOLYN P.
Publication year - 1993
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1993.tb04738.x
Subject(s) - short interest ratio , stock (firearms) , empirical evidence , transactional leadership , business , financial economics , economics , stock market , monetary economics , epistemology , horse , engineering , biology , mechanical engineering , paleontology , philosophy , context (archaeology) , management
This paper presents empirical evidence that trading in options contributes to both transactional and informational efficiency of the stock market by reducing the effect of constraints on short sales. The significantly higher average level of short interest exhibited by optionable stocks supports the argument that options facilitate short selling. We also find significant effects on option prices, related to the short interest in the underlying stock. We then present evidence that options also increase information efficiency. Earlier work, that is replicated and extended here, has suggested that short sale constraints cause stock prices to underweight negative information. Options appear to reduce that effect.