Option prices and costly short-selling

Atmaz, A and Basak, S (2019) Option prices and costly short-selling. Journal of Financial Economics. ISSN 0304-405X (In Press)

Abstract

Much empirical evidence shows that stock short-selling costs and bans have significant effects on option prices. We reconcile these findings by providing a dynamic analysis of option prices with costly short-selling and option marketmakers. We obtain simple, closed-form, unique option bid and ask prices that represent option marketmakers’ expected hedging costs, and are weighted-averages of well-known benchmark prices (Black-Scholes, Heston). Our analysis delivers rich implications that support the empirical evidence on the effects of short-selling costs and bans on option prices, as well as uncovering several novel predictions. We also apply our methodology to corporate bonds, which have option-like payoffs.

More Details

Item Type: Article
Subject Areas: Finance
Additional Information: © 2018 Elsevier. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0
Subjects: O > Option markets
Date Deposited: 13 Aug 2018 11:28
Last Modified: 18 Aug 2019 04:09
URI: http://lbsresearch.london.edu/id/eprint/999
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