Overcoming Arbitrage Limits: Option Trading and Momentum Returns (working paper)
Garcia Ares, P; Filippou, I; Abhyankar, A; et al.Haykir, O
Date: 24 July 2018
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Abstract
In this paper we find that the decline in the momentum profitability is driven by option trading. Momentum profits arise from the short leg and therefore on barriers to short selling. We find strong evidence that the presence of stock options creates alternate avenues for short selling, augmenting the stock lending market, thus ...
In this paper we find that the decline in the momentum profitability is driven by option trading. Momentum profits arise from the short leg and therefore on barriers to short selling. We find strong evidence that the presence of stock options creates alternate avenues for short selling, augmenting the stock lending market, thus contributing to improved pricing efficiency. However, when option trading becomes expensive, there are more barriers to short selling and the short position offers lower returns. Our results are robust to exogenous changes in short selling due to Regulation SHO and are supported by other short-leg depended anomalies.
Finance and Accounting
Faculty of Environment, Science and Economy
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