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Informed short sales and option introductions

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  • Benjamin Blau

Abstract

This study examines how the introduction of options affects the level of informed short selling. In particular, we test whether option introductions increases or decreases the level of informed short selling. Our tests are motivated by a theoretical debate in the literature. The first stream of literature argues that introducing options into markets may increase speculative trading which can result in less informed trading when informed traders perceive speculative trades as noise. The second stream argues that introducing options into markets improves the informational environment of the market because option prices provide an additional information mechanism for informed traders. We approximate informed short selling by examining (i) non-exempt short sales, (ii) contrarian short-selling activity, and (iii) the return predictability contained in shorting activity. Results show that non-exempt shorting activity increases after options become available. Further, we show that both the level of contrarian short selling and the return predictability contained in short selling increase after options are listed. Our results suggest that informed short selling increases after options are introduced. Copyright Springer-Verlag 2013

Suggested Citation

  • Benjamin Blau, 2013. "Informed short sales and option introductions," Annals of Finance, Springer, vol. 9(3), pages 365-382, August.
    • Handle: RePEc:kap:annfin:v:9:y:2013:i:3:p:365-382
    DOI: 10.1007/s10436-012-0190-5
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    More about this item

    Keywords

    Short sales; Option listings; Informed trading; G10; G14;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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