Dr Van Le

This paper examines the impact of short sale restrictions (SSR) on the price discovery process of stocks and their corresponding options. We utilize a new measure to examine the impact these restrictions have on information efficiency between the two instruments. Based on one year of intraday data surrounding the US emergency order of 2008, we find evidence of traders switching from SSR restricted products to a matched group of stocks and options. At the same time there is a decline in the role options provided to price discovery in the SSR affected stocks, along with a significant rise in the importance of options for the matched sample as informed traders move to trading in markets that are unaffected by the restrictions. From a policy perspective our results indicate that a greater consideration needs to be made for the impact SSR has on trade informativeness and the price discovery process, as well as how it affects the inter-related markets through the trader-switching effect.

Purpose: The purpose of this paper is to examine the effect of short-sale restrictions (SSR) with particular emphasis on their impact on the liquidity and informed trading in the stock and option markets. Design/methodology/approach: Using a panel regression with controls for volatility, VIX and matched stocks, this study examines the effect of the short-sale ban (SSB) on stock and option liquidity, expressed in terms of spread and volume. In addition, the PIN and option information share (OIS) measures have been used to analyze its impact on informed trading in those related markets. Findings: The results suggest that the SSB leads to a significant reduction in the liquidity of the affected stocks and their options. However, no significant change in the trader composition can be detected. This result is consistent to the short-prohibition effect predicted by Diamond and Verrecchia (1987). Research limitations/implications: Due to the sizeable data required to estimate the PIN and OIS measures, only a select sample of optionable stocks has been examined. Originality/value: This study offers both academics and policy makers some useful insights into the effect of SSR on trading activities in both stock and option markets. From a policy perspective, it clearly demonstrates that regulatory changes targeting a specific market also affect other related markets via the arbitrage link between them.

© 2014 Elsevier Inc.All rights reserved. Practitioners have long tried to exploit the predictability of the option implied volatility smile. Motivated by the recent developments in the literature focusing on market-based option pricing arguments, this paper proposes the introduction of trading volume into a vector autoregressive (VAR) model to improve forecasts of the smile dynamics. The augmented VAR-volume model produces quality forecasts of the smile surface and explains its dynamic changes over time relatively well. Our results suggest that the incorporation of trading volume leads to it outperforming other alternative forecast approaches, as well as being robust to a variety of perturbations of the data and offers scope for investors to more accurately predict option implied volatility in the future.